The British currency also rose after the dollar declined against 13 of 16 major currencies on speculation that credit- market losses are hurting U.S. economic growth. U.K. consumer- price inflation rose to 3.8 percent, compared with the 3.6 percent median estimate of economists surveyed by Bloomberg News. The Bank of England kept interest rate unchanged this month to curb inflation, even as economic growth slowed.
The pound rose to $2.0157, the strongest level since March 27, and was at $2.0094 by 1:35 p.m. in London, from $1.9951 yesterday. It also gained to 79.56 pence per euro, from 79.73.
Its trade-weighted index, a broader gauge of the currency's performance against Britain's major trading partners, rose to 89.25 from 88.99 yesterday. The index has fallen 4 percent since the start of this year.
Gilts advanced as a decline in stocks and concern the British housing slump will push the economy into a recession drove investor to the safety of government securities.
Shares fell in Europe and Asia, and U.S. index futures declined, sending the MSCI World Index to its lowest level since 2006 on concern that credit-market losses will deepen.
The U.S. Treasury Department and Federal Reserve assembled a rescue plan for Fannie Mae and Freddie Mac on July 13 to stem a collapse of confidence in the two companies, which own or guarantee about half of the $12 trillion in U.S. home loans.
Bank of England policy maker Andrew Sentance said inflation won't be brought back to the 2 percent target anytime soon as oil prices surge to records.
Sentance reiterated that the central bank expects slower growth to ease inflation pressures. Crude oil futures reached a record $147.27 a barrel on July 11 and have risen 96 percent in the past year. Prices for corn, wheat, soybeans and rice have also reached all-time highs this year.
Investors are paring bets the central bank will be able to lift interest rates to combat inflation. The implied yield on the December short-sterling futures contract fell to 5.85 percent from 5.90 percent yesterday.