By Paul Dobson May 5 (Bloomberg) -- The pound strengthened to 85 pence per euro for the first time in almost nine months amid speculation tomorrow’s U.K. election may leave the Conservative Party in a position to form a government. The U.K. currency climbed against 13 of its 16 most-traded counterparts after the Daily Telegraph reported that the Conservatives may be able to create an alliance with the Democratic Unionist Party. Opinion polls show no party will win an outright majority in parliament, potentially jeopardizing efforts to form an administration strong enough to reduce Britain’s deficit. “We’ve had some positive news on the election front,” said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. “It makes it more likely that sterling will be substantially higher come Friday.” The pound gained 0.8 percent to 85.09 pence per euro as of 2:55 p.m. in London, after earlier reaching 84.94 pence, the strongest level since Aug. 10. The U.K. currency slipped 0.3 percent to $1.5092. U.K. government bonds rose, with the two-year note yield falling 4 basis points to 1.05 percent. The 10-year gilt yield fell 5 basis points to 3.80 percent. A YouGov Plc survey showed support fading for the Liberal Democrats, the UK.’s third-largest party, who may hold the balance of power after the election. It gave 35 percent support to the Conservatives and 30 percent to Labour, with the Liberal Democrats slipping 4 points to 24 percent. A ComRes Ltd. daily poll showed 37 percent of respondents planned to vote Conservative, 29 percent backed the ruling Labour Party and 26 percent endorsed the Liberal Democrats. That would give the Conservatives 294 seats, 32 short of a majority, ComRes said. Budget Gap Concern the U.K. will struggle to narrow the biggest deficit in the Group of Seven nations has helped send the pound 6.4 percent lower against the dollar this year. Fitch Ratings said in March the U.K. government needs to reduce its budget deficit at a faster rate than currently planned because the nation’s credit profile has deteriorated “pretty sharply.” Traders may be betting that whichever party forms a government after the May 6 vote will deliver a plan to reduce the record budget shortfall, following reductions in the credit ratings of Greece, Portugal and Spain by Standard & Poor’s last week. U.K. Downgrade “What’s happening in the euro zone with the rating downgrades are most likely being followed by the U.K. candidates,” said Audrey Childe-Freeman, a senior currency strategist at Brown Brothers Harriman Ltd. in London. “No leader or no coalition government would like to experience a downgrade for U.K. debt.” Sterling has risen 3.7 percent against the Group of 10 currencies from this year’s low on March 10, according to Bloomberg correlation-weighted indexes. The yield on the short-sterling futures contract for June 2011 fell 14 basis points to 1.55 percent, indicating investors are adding to bets that interest rates will remain lower for longer.

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