BLBG: British Pound Posts Weekly Gains Against Dollar, Euro on Rates
By Matthew Brown
Nov. 21 (Bloomberg) -- The pound rose against the dollar and the euro this week as traders bet interest-rate cuts by the Bank of England will enable the U.K. to emerge faster from a recession.
The pound snapped two weeks of declines versus the currencies. The Bank of England signaled two days ago it's prepared to cut borrowing costs further after reducing its main rate 150 basis points on Nov. 6 to 3 percent, the lowest level since 1955. Traders are betting U.K. policy makers will cut their benchmark rate by another 75 basis points next month, according to a Credit Suisse Group AG index of derivatives.
``A lot of bad news has been priced into the pound already,'' said Paul Robson, a London-based currency strategist at Royal Bank of Scotland Group Plc. ``We already knew that rates were going to come down.''
The pound climbed 0.5 percent to $1.4803 at 5:41 p.m. in London, from $1.4727 yesterday and $1.4740 at the end of last week. Against the euro, the pound weakened to 84.91 pence, from 84.56 pence, paring its gain in the five days to 0.6 percent.
The Bank of England, led by Governor Mervyn King, considered a bigger reduction in the benchmark rate than the 1.5 percentage points announced Nov. 6, according to minutes of its meeting released this week. Policy makers discussed the need for a cut to less than 2.5 percent, the minutes showed.
Trade-Weighted Index
Central banks worldwide are discussing deeper reductions in rates as economies founder. Federal Reserve policy makers predicted the U.S. will contract through mid-2009, with some prepared to cut rates further, a record of their latest meeting showed two days ago. The Swiss National Bank unexpectedly cut its key rate 100 basis points to 1 percent yesterday.
The European Central Bank cut its main rate on Nov. 6 to 3.25 percent from 3.75 percent.
U.K. consumer prices rose 4.5 percent last month, down from 5.2 percent the month before and below economist estimates, the government said this week. The Office for National Statistics said Nov. 20 that retail sales shrank 0.1 percent last month, the second straight monthly drop.
The British currency's trade-weighted index rose 0.5 percent this week to 78.02, according to indexes compiled by Deutsche Bank AG, the world's biggest currency trader.
``I expect sterling-dollar to go slightly weaker next week,'' Robson said. ``Euro-sterling will go lower as it's clear that the ECB has to cut rates further than the Bank of England.''
Gilts Surge
The pound may be supported should the government announce in its pre-budget report next week changes to the tax regime that would make repatriating overseas earnings a more attractive option for U.K. companies, Adam Cole, global head of foreign-exchange strategy at the Royal Bank of Canada in London, wrote in an investor note.
The yield on the U.K. two-year note, more sensitive to interest rates, fell 20 basis points in the week to 1.98 percent. The 4.75 percent security due June 2010 rose 0.26, or 2.6 pounds per 1,000-pound ($1,477) face amount, to 104.16.
The yield on the U.K. 10-year gilt slid 21 basis points to 3.86 percent, the lowest since June 2003 on a closing price basis. Yields move inversely to bond prices.
The securities returned 1.3 percent in the past week, according to Merrill Lynch & Co.'s U.K. Gilts Index. U.S. and European government bonds handed investors 2.6 percent and 1.2 percent, respectively, Merrill's U.S. Treasury Master and EMU Direct indexes showed.
To contact the reporter on this story: Matthew Brown in London on mbrown42@bloomberg.net
