By Lukanyo Mnyanda June 3 (Bloomberg) -- The pound traded near its highest level in three weeks versus the dollar as a report showed U.K. house prices rose to the highest in almost two years and stocks rallied, fueling optimism the economic recovery is solidifying. Sterling was within 1 pence of its strongest level since December 2008 against the euro. Ten-year gilts fell, snapping three days of gains, as the equity rally sapped demand for the perceived safety of fixed income and the government sold 2 billion pounds ($2.9 billion) of securities maturing in 2034. “We’re having a good day for risk,” Elsa Lignos, a currency strategist at Royal Bank of Canada in London, said by telephone. “The data shows signs for a weak recovery, but it’s still early days.” The pound was unchanged at $1.4652 as of 2:10 p.m. in London. It reached $1.4771 yesterday, the strongest level since May 13. The U.K. was 0.1 percent weaker at 83.67 pence per euro after advancing to 82.80 yesterday. It advanced for a fourth consecutive day versus the yen, gaining 0.4 percent to 135.57. Nationwide Building Society said today that the average cost of a home increased 0.5 percent in May to the highest level since July 2008. The report added to evidence the housing market is recovering after values dropped by about 20 percent during the recession. Stock Rally The benchmark FTSE 100 Index climbed 1.9 percent, after declining the past three days amid concern that Europe’s debt crisis will dent the economic recovery. Britain’s currency has climbed 6 percent against the euro this year on speculation U.K. growth will outpace that in the 16 euro economies. The 10-year gilt yield increased five basis points to 3.61 percent, while the yield on the two-year note rose four basis points to 0.92 percent. Investors should use gains in the pound to about $1.51 as an opportunity to sell, as the economic data hasn’t been “strong enough to inspire confidence in a sustained sterling recovery,” analysts at BNP Paribas SA, led by Hans-Guenter Redeker in London, wrote in a client note today. An index of U.K. take-home pay fell to a record low in May, signaling that consumers’ spending power is diminishing, VocaLink Ltd. said. Annual wage growth after tax and other deductions slowed to 0.5 percent, the lowest level since data began in 2004, from 0.8 percent in April. VocaLink processes 90 percent of U.K. salaries paid directly to bank accounts. Gilt Auction Today’s gilt auction attracted bids equivalent to 1.87 times the amount on offer and the securities were priced to yield an average 4.327 percent, the Debt Management Office said. The U.K. plans to issue 185.2 billion pounds of gilts this fiscal year as it seeks to plug the biggest budget deficit among the Group of Seven nations. The government may cut its gilt-sales requirement by as much as 13 percent as the recovery gathers pace and it takes steps to reduce the budget shortfall, Citigroup Inc. said. “There is plenty of scope for the gilt market to be surprised by the scale of the potential reduction in gilt issuance over the next few years,” Jamie Searle, a fixed-income strategist in London, wrote in an investor note today. “Gilt issuance needs for this fiscal year are likely to be around 25 billion pounds lower than the current remit implies.” --With assistance from Paul Dobson, Svenja O’Donnell and Scott Hamilton in London. Editors: Keith Campbell, Dennis Fitzgerald. To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net To contact the editor responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net

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