The pound also climbed from a two-week low versus the dollar on speculation the Bank of England will next week announce a plan to help end a logjam in money markets. It rebounded from a record against the euro as technical charts showed it's due to gain ground after dropping 10 percent this year. Traders bought the pound and sold the yen as they returned to the carry trade.
Britain's currency rose to $1.9792 by 12:08 p.m. in London, from $1.9723 yesterday. It also climbed to 80.37 pence per euro, from 80.86 pence yesterday, when it slid to an all-time low of 80.99 pence. The pound climbed versus 15 of the 16 most-traded currencies, rising most against the yen. It gained 1 percent to a nine-day high of 202.85 versus the Japanese currency.
Stocks in Europe rose for a third day, with the benchmark Dow Jones Stoxx 600 Index climbing 0.4 percent. The U.K.'s FTSE 100 Index rallied 0.2 percent, led by banks including Alliance & Leicester Plc, HBOS Plc and Barclays Plc.
The Bank of England may announce a plan to temporarily exchange troubled mortgage-backed debt on banks' balance sheets for government bonds to help them resume lending, BBC Radio 4 reported.
The U.K. central bank said today financial institutions bid for 50 billion pounds at its weekly auction, the most in three months, amid a lending squeeze that originated with the collapse of the U.S. subprime-mortgage market.
The pound also rose against the dollar before a Federal Reserve report that's forecast to show manufacturing in the Philadelphia region contracted in April for a fifth month.
The Fed Bank of Philadelphia's general economic index reached minus 15, from minus 17.4 last month, according to the median forecast of 51 economists in a Bloomberg survey before the report at 10 a.m. in Washington today.
The U.K. currency's trade-weighted index rose to 87.98, from 87.59 yesterday. That's still below the average 97.56 over the past 12 months, according to Bloomberg data.
Carry-trade investors borrow the yen or Swiss franc at their low interest rates and convert the proceeds into a currency, such as the pound, they can lend out for a higher return. They earn the spread between the two rates, taking the risk currency moves will erase their profit.
Britain's 5 percent main rate is the highest among the Group of Seven nations and compares with 0.5 percent in Japan, 2.25 percent in the U.S. and 2.75 percent in Switzerland.