The pound rose against the euro, dimming the possibility that it will slide to parity with the European currency, on bets the U.K. government will guarantee asset-backed securities to help revive bank lending. Sterling also gained versus the Japanese yen and the Swiss franc. Guaranteeing asset-backed securities would encourage banks to lend because they can sell the loans as securities, providing a boost to the British economy. “The most important positive news for sterling has been talk of this government discussion concerning providing a guarantee for asset-backed securities,” said Hans-Guenter Redeker, global head of foreign-exchange strategy at BNP Paribas SA in London. “The target is to bring the retail market for this bond segment back into play.” The pound rose as much as 2.2 percent, strengthening beyond 94 pence for the first time since Dec. 23. It traded at 93.66 pence per euro at 12:26 p.m. in London, compared with 95.69 on Jan. 2. The pound advanced 1.8 percent to 1.6014 versus the franc and 2.5 percent to 135.53 against the yen. It was little changed at $1.4538. The pound fell 23 percent against the European currency last year, its biggest decline since the euro came into existence in 1999, as the Bank of England cut rates faster than the European Central Bank and the British economy entered its first recession in 17 years. Policy makers will probably cut the benchmark interest rate to 1.5 percent on Jan. 8, the lowest level in the bank’s three- century history, according to the median forecast of 50 economists in a Bloomberg News survey. BOE’s King Bank of England Governor Mervyn King may follow the Federal Reserve and pursue other ways of pumping money into the British economy, such as expanding the 200 billion pound program that allows banks to swap illiquid securities for government debt, economists said today. “The balance between moral hazard and doing what’s necessary to get the economy back on track is shifting,” said Nick Kounis, chief European economist at Fortis in Amsterdam and a former U.K. Treasury official. “Euro-sterling could see a significant decline,” said Redeker, who predicts the pound strengthening to 90 pence per euro by the end of March and to 84 pence by year-end. The euro is poised to decline by 10 percent versus a basket of currencies including the pound, the Norwegian krone and the Swedish krona, Goldman Sachs Group Inc. said. ‘Attractive Valuations’ “Forced euro buying is likely to abate as tension in credit markets becomes less severe,” currency strategists led by Jens Nordvig, New York-based senior global market economist at Goldman Sachs, wrote in a note today. “Investor flows in part driven by attractive valuations are likely to pick up as we enter a new year and as risk taking picks up somewhat from very depressed levels in the fourth quarter of 2008.” U.K. construction, which accounts for 6 percent of the economy, contracted last month at the fastest pace in more than a decade, according to an index based on a survey of purchasing managers at building companies by London-based Chartered Institute of Purchasing and Supply and Markit. Government bonds fell, pushing the yield on the 10-year gilt up nine basis points, or 0.09 percentage point, to 3.12 percent. The 5 percent security due in March 2018 declined 0.79, or 7.9 pounds per 1,000 pounds ($1,452) face amount, to 114.85. The two-year gilt yield rose six basis points to 1.83 percent. Gilts fell as FTSE 100 equities gained for a fifth day. Prime Minister Gordon Brown promised yesterday to create up to 100,000 jobs and renew efforts to spur bank lending as he tries to pull Britain out of its first recession since 1991.

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