The pound advanced to its highest level in more than a month against the dollar and gilts tumbled after a government report showed inflation unexpectedly accelerated in February. The pound surged to the strongest since December versus the Japanese yen as the rate of inflation in February unexpectedly rose, which central bank Governor Mervyn King partly blamed on a weaker pound. Stocks in Asia and some European markets gained after U.S. Treasury Secretary Timothy Geithner unveiled proposals to finance as much as $1 trillion in purchases of illiquid property assets. The drop in gilts pushed the 10-year yield up by the most in six weeks. “The risk premium that sterling has taken on works both ways, and you can see it outperforming whenever risk appetite picks up,” said Gavin Friend, a markets strategist in London at National Australia Bank Ltd. “We’re less likely to see the governor talking the currency down and from that point of view, sterling could regain some of its losses.” The pound rose as much as 1.4 percent to $1.4779, the highest level since Feb. 10, and was at $1.4688 by 2 p.m. in London. It strengthened to 91.73 pence per euro, the highest level since March 16, from 93.56 pence yesterday. Against the yen, the currency jumped as much as 2.7 percent to 145.09, the strongest level since Dec. 1. The U.K. currency may advance toward $1.50 by May, after breaking through the key level of $1.4650, Friend said. Consumer prices climbed an annual 3.2 percent, compared with 3 percent in January, the Office for National Statistics said today in London. The median estimate of 28 economists surveyed by Bloomberg was for a rate of 2.6 percent. Annual Performance The pound slumped 23 percent versus the euro and 26 percent against the dollar last year as the U.K. economy slipped into its first recession since 1991 amid record losses at the nation’s banks, prompting the Bank of England to cut the main interest rate to a record low of 0.5 percent in 2009. The currency rallied 3.6 percent versus the euro and 0.9 percent against the dollar this year. The pound’s trade-weighted index, a gauge of its performance against currencies including the yen, Swiss franc, euro and dollar rose a fourth day, extending its gain this quarter to 3.9 percent. The increase in the rate of inflation may reflect the depreciation of the pound, King said in an open letter to the government published today, after saying on Jan. 20 cheaper oil and a weaker currency would spur demand. The bank’s inflation target is 2 percent. ‘Volatile Inflation’ “Notwithstanding the inflation outturn for February, it is likely that over the next year CPI inflation will move below target, although the profile of inflation could be volatile,” King said in the letter. Bonds trading showed investors’ inflation expectations are rising, with the difference in yield, or spread, between the five-year gilt and its index-linked counterpart widening to the most in five months. The so-called breakeven rate was at 1.52 percentage points, the most since Oct. 16. The rate was negative in December. U.K. conventional bonds fell, pushing the yield on the 10- year gilt 16 basis points higher to 3.30 percent. The 4.5 percent security due March 2019 slipped 1.46, or 14.6 pounds per 1,000-pound face amount, to 110.15. The yield on the two-year note slipped two basis points to 1.30 percent. Yields move inversely to bond prices. The spread between the notes widened 17 basis points to 198 basis points, the most since March 5. The so-called widening of the yield curve reflects reduced demand for the longer-dated securities, which are more sensitive to the inflation outlook.

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