Pound Rises on Producer Prices


The pound rebounded from a two-week low against the euro and climbed versus the dollar after a surge in U.K. producer prices prompted traders to pare bets the Bank of England will cut interest rates next month.

Gilts fell, pushing two-year yields up from the lowest level in a month, before the bank's quarterly inflation report May 14 which will signal how much room policy makers have to lower borrowing costs to stoke the economy. U.K. factory-gate prices last month climbed at the fastest annual pace since at least 1986, a government report showed today.

The pound climbed as much as 0.7 percent to 78.72 pence per euro, and was at 78.90 pence as of 12:35 p.m. in London. It last week slipped 1.3 percent. The U.K. currency also rose to $1.9584, from $1.9539, reversing an earlier decline, and gained versus 15 of the 16 most-traded currencies tracked by Bloomberg.

Gilts dropped the most in more than a week on reduced wagers for lower borrowing costs and as a rally in European stocks damped demand for the safety of government debt.

The spread, or difference in yields, between two- and 10- year notes narrowed 1 basis point to 27 basis points on bets the central bank won't cut rates anytime soon. The spread declined to 21 basis points on April 23, the least since Feb. 1.

Stocks in Europe rose for the first time in three days, with the benchmark Dow Jones Stoxx 600 Index gaining 0.5 percent and the U.K.'s FTSE 100 climbing 0.4 percent.

The rally gave investors the confidence to buy higher- yielding currencies, such as the pound, funded with cheaper loans from elsewhere in so-called carry trades. Investors earn the spread between the two interest rates, taking the risk market volatility will erase their profit.

The U.K.'s 5 percent main rate compares with 0.5 percent in Japan and 2.75 percent in Switzerland. The pound today climbed the most against the Japanese and Swiss currencies, rising 1.3 percent to 203.60 yen and 1 percent to 2.0553 francs.

Prices charged by U.K. factories rose 7.5 percent from a year earlier, the most since records began two decades ago, the Office for National Statistics said today in London. In the month, prices increased 1.4 percent, also the fastest pace on record.

 


TradingEconomics.com, Bloomberg
5/12/2008 6:30:36 AM