U.K. Pound Rises Against Dollar


The pound rose from a two-week low against the dollar on speculation the Federal Reserve will cut interest rates by the most in two decades today, boosting the yield advantage of U.K. assets.

The pound also rebounded from a three-year low versus the yen and climbed from a record against the euro as traders added to bets the U.S. central bank will reduce its key rate by at least 1 percentage point. Gilts fell after a government report showed U.K. inflation accelerated to a nine-month high, limiting the Bank of England's scope to cut borrowing costs.

The pound rose to $2.0151 by 11:11 a.m in London, from $1.9990 yesterday. It climbed to 78.46 pence per euro, from 78.69 pence yesterday, when it slipped to 79.12 pence, the lowest level since the common currency's 1999 inception. The pound also advanced to 196.18 yen, from 194.58 yen, the weakest since January 2005.

The pound was supported after the Office for National Statistics said U.K. consumer prices climbed an annual 2.5 percent in February, compared with 2.2 percent the month before. The result matched the median prediction of 31 economists in a Bloomberg News survey. Prices rose 0.7 percent in the month, the most since May 2001.

Britain's currency was buoyed after stock-market gains in Europe and Asia prompted investors to return to buying higher- yielding currencies using cheap loans from Japan and Switzerland, in so-called carry trades.

These investors earn the spread between the rates of the currencies in which they borrow and re-invest money, taking the risk market volatility will wipe out their profit. The U.K.'s 5.25 percent main rate is the highest among the Group of Seven nations. Japan and Switzerland's benchmark rates are the lowest among industrialized economies at 0.5 percent and 2.75 percent, respectively.

The pound tumbled yesterday after the Fed cut its so-called discount rate in its first weekend emergency action since 1979, stoking speculation credit losses are spreading.


TradingEconomics.com, Bloomberg
3/18/2008 7:02:07 AM