British Pound Gains Against Dollar as Banking Stocks Advance

By Matthew Brown

June 24 (Bloomberg) -- The pound strengthened against the dollar and the euro as banking stocks advanced and the Organization for Economic Cooperation and Development raised its forecast for U.K. growth next year

The British currency also gained versus the Japanese yen and the Swiss franc as the FTSE 350 Banks Index rose as much as 1.6 percent, snapping a two-day decline, while the FTSE 100 Index of U.K. shares was little changed. The Organization for Economic Cooperation and Development said Britain’s economy, Europe’s second-largest, will stabilize next year, revising an earlier forecast for a contraction.

“If the banking sector is outperforming even while the main index is not, then that can help out the pound versus the dollar,” said Gavin Friend, a markets strategist at National Australia Bank in London. “I wouldn’t expect to see much more of a gain in the short term.”

The pound rose 0.7 percent to $1.6577 as of 11:19 a.m. in London. Against the euro it strengthened 0.6 percent to 84.92 pence. The British currency rose 0.7 percent to 157.76 yen and added 0.7 percent to 1.7672 Swiss francs.

The FTSE 350 Banks Index rose 1.3 percent after dropping a combined 3.5 percent in the previous two days. The FTSE 100 Index gained 0.2 percent. The correlation between the pound- dollar exchange rate and the banks index this year is more than 79 percent.

The U.K. economy will recover “mildly” next year, according to the OECD, compared with a previous projection of a 0.2 percent contraction. Gross domestic product will drop 4.3 percent this year, compared with a March forecast of 3.7 percent.

Global Growth Upgraded

The combined economy of the world’s most-industrialized countries will shrink 4.1 percent this year and grow 0.7 percent in 2010, the Paris-based OECD, which was founded in 1961 to coordinate international economic policies, said today. The new projections compare with March forecasts for contractions of 4.3 percent and 0.1 percent.

The pound extended its advance against the euro after the European Central Bank said it will lend banks 442 billion euros ($621 billion) for 12 months as it steps up efforts to unblock credit markets in the 16-nation euro region.

The Frankfurt-based ECB filled all bids in its first auction of 12-month loans to banks at the current benchmark interest rate of 1 percent. It said the 1,121 banks that participated will receive the funds tomorrow.

U.K. government bonds rose, pushing the yield on the 10- year gilt down three basis points to 3.71 percent. The 4.5 percent security due March 2019 advanced 0.22, or 2.2 pounds per 1,000-pound face amount, to 106.38.

The two-year gilt yield fell three basis points, or 0.03 percentage point, to 1.19 percent. Bond yields move inversely to prices.

The Bank of England plans to buy 3 billion pounds of gilts maturing between 2014 and 2017 today, as part of its quantitative easing program. The Bank has so far purchased 96 billion pounds of gilts.

To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net