July 26 (Bloomberg) -- The pound rose to a six-week high against the dollar after a report showed U.K. economic growth matched economists' forecasts and U.S. lawmakers failed to agree on a debt plan, boosting the relative appeal of British assets. Britain's currency erased an earlier decline against the euro and climbed versus the yen after the data showed gross domestic product rose 0.2 percent in the second quarter, slowing from the first quarter's 0.5 percent pace. That matched the median forecast of 32 economists in a Bloomberg News survey. "There's a bit of relief that the data wasn't weaker than expected," said Simon Smith, chief economist at FXPro Financial Services Ltd. in London. "The pound is benefiting against the dollar because of that and because of what's going on with the U.S. debt situation, which is affecting all currencies." The pound was 0.8 percent stronger at $1.6411 as of 1:37 p.m. in London after reaching $1.6417, the highest level since June 14. It was little changed at 88.27 pence per euro, after weakening as much as 0.6 percent before the data was released. It gained 0.5 percent to 128.137 yen. The dollar fell against its major counterparts as President Barack Obama said the U.S. may have a "deep economic crisis" if leaders fail to reach a compromise and avoid a debt default. Sterling is still down 7.5 percent in the last 12 months, making it the second-worst performer among 10 developed-market currencies after the U.S. dollar, according to Bloomberg Correlation-Weighted Currency Indexes. 'Relief Rally' "We have seen a pound relief rally," said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. "We don't feel that this fundamentally changes the general weak outlook for the U.K." Bank of England officials said this month that the weakness in the economy may persist "for longer than previously thought" as they kept the key interest rate at 0.5 percent. Seven of the bank's nine-member Monetary Policy Committee, led by Governor Mervyn King, voted to keep the rate unchanged this month, saying that recent developments "reduced the likelihood that a tightening in policy would be warranted in the near term." One official wanted more stimulus and two favored a rate increase. Interest-Rate Outlook The central bank will keep the rate at 0.5 percent until the first quarter of next year, when it will increase it to 0.75 percent, according to a Bloomberg survey of 20 economists. The European Central Bank has raised its refinancing rate twice this year, to 1.5 percent, and is forecast to increase it to 2 percent by the end of the first quarter of next year, a separate survey shows. Bank of England policy maker Martin Weale said it would be "naive" to exclude the risk of a double dip in the U.K. economy, the German newspaper Handelsblatt reported today, citing an interview. Even so, an increase in the central bank's benchmark interest rate by a quarter of a percentage point in recent months would have had "very little impact on demand," while signaling that the bank is equally worried about inflation and economic growth prospects, the newspaper cited Weale as saying. While the U.K. economy is struggling to pick up, price growth continues to exceed the Bank of England's 2 percent target. Inflation was 4.2 percent in June, and the central bank said last week it would "likely" exceed 5 percent in the coming months. U.K. 10-year government bonds declined, with the yield rising four basis points to 3.09 percent. Two-year yields climbed two basis points to 0.73 percent. The U.K. priced 4 billion pounds of additional inflation- linked bonds due in 2034 to yield 4.5 basis points more than gilts, according to a banker involved in the transaction. --With assistance from Benjamin Martin in London. Editors: Keith Campbell, Matthew Brown

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