By Matthew Brown Dec. 10 (Bloomberg) -- The British pound rose against the dollar as optimism U.S. lawmakers will approve a bailout for automakers fueled demand for the currencies of countries with higher interest rates. The pound also strengthened against the yen and the euro even after the London-based National Institute for Economic and Social Research said the U.K. economy may shrink this quarter at the fastest pace since 1990. U.S. lawmakers reached a tentative agreement to rescue General Motors Corp. and Chrysler LLC that would protect jobs and parts suppliers. The MSCI World index of stocks gained 0.4 percent and Standard & Poor’s 500 futures expiring this month rose 1.4 percent. “Hopes on the auto-recovery package and stronger equities helped currencies bounce back against the dollar,” said Steven Barrow, head of G10 currency research at Standard Bank Plc in London. “Data everywhere is just horrible and the market’s ability to filter this and determine if some place is doing worse or better than another is quite limited right now.” The pound advanced to $1.4822 by 11:45 a.m. in London, from $1.4750 yesterday, and traded as high as 1.4865. It climbed to 87.38 pence per euro, from 87.60 pence. The pound slipped 26 percent against the dollar and 19 percent versus the euro this year as the Bank of England reduced its benchmark interest rate to 2 percent, from 5 percent, to fend off the U.K.’s first recession in 17 years. There is a 98 percent probability the Federal Reserve will cut its key rate to 0.25 percent at its next meeting Dec. 16. Shrinking Economy Gross domestic product fell 1 percent in the three months through November and will probably plunge more than that in the last three months of the year, said the London-based National Institute, whose clients include the central bank. The economy last shrank at such a speed in the third quarter of 1990, when it contracted 1.2 percent. The pound was also buoyed as Chancellor of the Exchequer Alistair Darling is said to be considering credit guarantees for U.K. households and companies to spur bank lending. Darling is looking at a range of options to revive credit including whether to expand a 250 billion pound ($370 billion) Treasury program to support bank debt so it covers mortgages and other loans, a person familiar with the plan said. U.K. government bonds rose, pushing the yield on the 10-year gilt down three basis points to 3.55 percent. The 5 percent security due March 2018 gained 0.21, or 2.1 pounds per 1000-pound face amount, to 111.33. The two-year note yielded 1.86 percent. Gilt Returns Gilts returned 8.5 percent this year, compared with 10.4 percent for European bonds and 11.9 percent for Treasuries, according to Merrill Lynch & Co indexes. The pound will rise to between $1.50 and $1.55 “in the next few weeks,” Barrow predicted. “In the first few months of next year sterling will be on the back foot again, in the $1.35 to $1.40 range.” The pound will fall versus the dollar and the yen because the U.K. economy will deteriorate more than is implied in the current sterling price, Societe Generale SA said today. “Staying short of sterling also continues to be a key conviction of ours,” a team of fixed-income and currency strategists headed by London-based Vincent Chaigneau wrote in a report. “We do not judge that all the bad news is fully priced in the currency.” To contact the reporters on this story: Matthew Brown in London on mbrown42@bloomberg.net

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