June 10 (Bloomberg) -- The pound climbed to the highest level this year against the euro and rose versus the dollar as stocks gained and a government report showed manufacturing in the U.K. expanded for a second month. The British currency also strengthened against the yen as equities snapped two days of losses, pushing the benchmark FTSE 100 Index to a one-week high. Production increased 0.2 percent in April from March, when it rose by the same amount, the office for National Statistics said today. Bank of England Deputy Governor Paul Tucker said yesterday confidence may be stabilizing. “Sterling is still very much correlated to equity markets,” said Ian Stannard, a currency strategist in London at BNP Paribas SA. “The biggest factor is the overall improving investment environment, which is going to be supportive for sterling.” The pound strengthened as much as 0.7 percent to 85.68 pence per euro, the highest level since Dec. 3, and was at 85.88 pence by 2 p.m. in London. It also rose 0.5 percent to $1.6385 and 1.1 percent to 160.58 yen. The pound may appreciate to $1.69 in “coming weeks,” Stannard said. Government efforts to revive Britain’s economy are showing signs of bearing fruit, helping to push the pound up more than 12 percent this year against the dollar. U.K. consumer demand increased more than expected in May, Nationwide Building Society said June 3 and service industries grew, according to the Chartered Institute of Purchasing and Supply. House prices unexpectedly climbed 2.6 percent from April, Lloyds Banking Group Plc’s Halifax unit said June 4. Global Confidence Confidence in the global economy rose for a third month, a Bloomberg survey of users in six continents showed today. The British currency also rallied after Prime Minister Gordon Brown fended off calls to resign after winning the support of most of his party colleagues at a meeting on June 8. Brown’s governing Labour Party finished third in EU elections after weeks of newspaper reports detailing excessive expenses by lawmakers. The pound dropped the most in three months last week versus its U.S. peer as a series of resignations and calls for Brown to step down prompted him to reshuffle his government. ‘Political Turmoil’ “The U.K. political turmoil will return to haunt the pound,” said Neil Jones, head of hedge fund sales at Mizuho Corporate Bank Ltd. in London. “But for now attention is shifting away from the parliament to the private-sector economy.” Investors should end bets the pound will fall against currencies such as the euro, according to Citigroup Inc. “While it is true the economic data in the U.K. remains weak on an absolute basis, data have recently shown more propensity to surprise on the upside then any other major country,” Todd Elmer, a strategist in New York, wrote in a report yesterday. Gilts fell, pushing the 10-year yield up six basis points to 3.90 percent. The 4.5 percent security due March 2019 dropped 0.47, or 4.7 pounds per 1,000-pound face amount, to 104.79. The two-year gilt yield was little changed at 1.44 percent. Bond yields move inversely to prices. Gilts lost 3.2 percent this year, according to Merrill Lynch & Co.’s U.K. Gilts Index. That compares with declines of 1.5 percent for German government debt and 6.2 percent for U.S. Treasuries, Merrill’s German Federal Governments and U.S. Treasury Master indexes show. The two-year yield rose 36 basis points this month amid speculation the worst of the recession is over, narrowing the difference in yield, or spread, between two- and 10-year gilts to 240 basis points, the least since April 29.

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