By Anchalee Worrachate and Matthew Brown June 21 (Bloomberg) -- The pound rose to a five-week high against the dollar as London’s record asking prices for homes and China’s signal of an end to the yuan’s fixed rate to the greenback spurred demand for currencies tied to economic growth. “The Chinese move has been good for risk assets like the pound, because it signals they are confident in the recovery,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. “The good house price data is also positive for sterling.” The pound increased 0.2 percent to $1.4848 at 12:31 p.m. in London, after earlier climbing to $1.4937, the highest level since May 12. Sterling was little changed at 83.53 pence per euro and gained 0.9 percent to 135.61 yen. Average asking prices for homes in London rose 2.2 percent in June from the previous month to 429,597 pounds ($636,000), Rightmove Plc said. China said on June 19 it will allow greater currency “flexibility,” stoking a rally in global stock markets today. The U.K.’s government bonds rose before the release of the budget tomorrow, with the yield on the 10-year gilt dropping 2 basis points, or 0.02 percentage point, to 3.52 percent. The 2- year yield fell 2 basis points to 0.85 percent. Spending Cuts The government will issue 165 billion pounds of gilts in the year ending March 31, down from 185.2 billion pounds projected in April and last year’s record 227.6 billion, the survey showed. Osborne will present his emergency budget tomorrow, the first since the Conservative-Liberal Democrat coalition came to power last month. Osborne is preparing to outline the deepest spending cuts since the 1970s to rein in the deficit, which amounts to 11.1 percent of gross domestic product, the biggest among the Group of Seven nations. Britain faces a “formidable” fiscal challenge and needs to accelerate plans to scale back spending, Fitch Ratings said on June 8. Osborne announced an initial 6 billion pounds of reductions on May 24. Gilts outperformed U.S. Treasuries today, with the premium investors demand for Britain’s debt narrowing to 25 basis points, from 32 basis points on June 18. Futures Bets Sterling also rose as futures traders trimmed bets that the pound will decline against the dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the pound compared with those on a gain -- so-called net shorts -- was 48,134 on June 15, compared with net shorts of 74,680 a week earlier. That’s the lowest level since Feb. 5. “Investors had a very pessimistic view about Britain earlier this year,” said Neil Jones, head of currency hedge fund sales at Mizuho Financial Group Inc. in London. “There were speculations about ratings downgrades and slow growth. But economic numbers have since improved, and we now have a new government which appears to be committed to reducing budget deficit.” Stocks, commodities and oil prices rose after China signaled it will relax the yuan’s fixed rate to the dollar. The Chinese currency rose the most since July 2005 revaluation. The People’s Bank of China said it will end a two-year currency peg adopted during the global financial crisis to protect exporters, a sign policy makers expect the world economy to strengthen. China, the world’s largest copper consumer and second-biggest user of oil after the U.S., signaled the change before the G-20 summit in Toronto on June 26-27. --With assistance from Paul Dobson. Editor: Dennis Fitzgerald, Keith Campbell To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Matthew Brown in London at mbrown42@bloomberg.net To contact the editor responsible for this story: Keith Campbell at k.campbell@bloomberg.net

Source