The pound strengthened the most in a week against the dollar amid optimism the Bank of England’s decision to reactivate its bond-purchase program will help revive the U.K.’s weakening economy. Sterling appreciated versus all but one of its 16 major peers after policy makers boosted the central bank’s quantitative-easing program by 75 billion pounds ($115 billion) yesterday and central bank Governor Mervyn King said he was “confident” the measures would work. The U.K. currency rallied even after Moody’s Investors Service downgraded 12 British financial institutions. Gilts declined. “It does appear that U.K. authorities are taking a proactive position,” said Jane Foley, a senior currency strategist at Rabobank International in London. “Sterling fundamentals are weak definitely in an absolute way, but at least there is coherence.” The U.K currency may strengthen to 85 pence per euro by year-end, she said. The pound gained 0.5 percent to $1.5520 as of 12:01 p.m. in London after rising as much as 0.7 percent, the biggest intraday gain since Sept. 29. The currency rose 0.5 percent to 86.59 pence per euro, and climbed 0.5 percent to 119.03 yen. Sterling has risen 2.3 percent in the past month and 3 percent in the past quarter, according to Bloomberg Correlation- Weighted Indexes, which measure the foreign exchange of 10 developed markets. The U.K. central bank’s decision yesterday represents the biggest stimulus since the depths of the recession. King said the move, the first loosening of monetary policy since 2009, was a response to what may be the worst financial crisis ever. Europe Concern The pound rose for the first time in four days against the euro on speculation French President Nicolas Sarkozy and German Chancellor Angela Merkel remain divided about how to solve the region’s debt crisis. Merkel has cited the need to prepare for the default that investors see as a sure thing. Sarkozy, whose banks have the most to lose, is unwilling to gamble on letting Greece go. The two will meet in Berlin on Oct. 9 to discuss the debt crisis. “Sterling is more and more likely to do well against the euro going forward,” said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. “It’s just this sense of inevitability that the euro zone in some way or other is going to unravel.” U.K. factory output prices rose more than economists forecast in September, the Office for National Statistics said today. Prices charged at factory gates rose 0.3 percent from August. The median forecast of 18 economists in a Bloomberg News survey was for a 0.2 percent increase. Moody’s Cut The pound advanced even as Moody’s cut the senior debt and deposit ratings of lenders including Royal Bank of Scotland Group Plc, concluding the government would be less likely to provide support for them if they became financially troubled. Ten-year gilts fell for a third day, pushing the yield up five basis points to 2.45 percent. The two-year yield was little changed at 0.62 percent. Gilts have returned 12 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, surpassing the 7.3 percent gain for German bunds and 8.8 percent increase for U.S. Treasuries. To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net. To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.

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