Pound Rises Against Dollar, Yen on Stock Gains; Gilts Decline

The pound rose against the dollar and the yen, fueled by gains in stocks and signs the global economic recovery is being sustained.

The pound also strengthened against 14 of 16 most active currencies as a report showed China’s manufacturing expanded at the fastest pace in four months in September and Fitch Ratings boosted its 2010 growth forecast for the U.K. The FTSE 100 Index jumped 0.9 percent, snapping two days of declines.

“The data from China suggests that perhaps the pessimism in the market about the global economy has gone too far,” said Jane Foley, a senior currency strategist at Rabobank International in London. “It injects some risk appetite into the market, and the pound reacts positively to that.”

The pound increased 0.7 percent against the dollar to $1.5832 as of 1 p.m. in London. Sterling jumped 5.2 percent in the third quarter, its biggest three-month gain since the period ended June 2009. It traded 0.4 higher against the yen at 131.8.

Gilts fell as gains in stocks reduced bids for fixed-income securities. The yield on the 10-year gilt climbed 4 basis points to 2.99 percent, and the two-year yield was up 2 basis points, to 0.67 percent.

An index of U.K. manufacturing growth dropped to a 10-month low last month, with the gauge falling to 53.4 from a revised 53.7 in August, data from the Chartered Institute of Purchasing and Supply and Markit Economics said today. The median estimate of 23 economists in a Bloomberg News survey was for a reading of 53.8. A measure above 50 indicates expansion.

Weekly Move

Gilts handed investors a 3.8 percent return in the third quarter, beating a 2 percent gain from German bonds and a 2.7 percent increase from U.S. Treasuries, according to indexes compiled by Bank of America Merrill Lynch.

Further gains in the pound may be limited. The currency is headed for a weekly loss against 14 of 16 most active currencies on speculation that the Bank of England will soon resume its bond-purchase program to support the economy. The so-called quantitative easing may undermine sterling as it’s seen as inflationary.

Policy maker Adam Posen said this week that Bank of England officials should discuss more bond purchases. The British Chambers of Commerce, a lobby group representing 100,000 companies, gave its backing to Posen’s idea.

“Adam Posen is right, BCC Chief Economist David Kern said in an interview in London. “All the evidence that we have suggests growth is slowing. Possibly as early as November we will get more quantitative easing.”

The pound has fallen 4.4 percent against developed-world currencies so far this year, according to Bloomberg Correlation- Weighted Currency Indices.

‘Global Factors’

Gilts declined alongside AAA-rated German bonds and French government securities as peripheral bonds, including those issued by Spain and Ireland, rallied amid signs that Europe’s high-deficit countries are tackling their crises.

Ireland’s government said yesterday it’s preparing to take majority control of Allied Irish Banks Plc and pump extra cash into Anglo Irish Bank Corp. to draw a line under its financial crisis.

“Gilts have fallen on global factors,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Data-wise, Europe’s doing well and plans have been announced that have given the market that bit of belief that maybe there is a way out of it. It’s taken a little bit of the edge off the gilt market.”

Demand for Europe’s safest assets also declined as European Central Bank Governing Council member Ewald Nowotny said the central bank will continue buying government bonds from countries with fiscal problems as long as there are inefficiencies in the markets, Wirtschaftwoche reported, citing an interview.

“Markets are exaggerating the risk premiums” for government bonds for countries including Ireland and Portugal, Nowotny was cited as saying. “As long as these inefficiencies prevail, we will correct them.