Pound Rises to 26-Year High on Speculation BOE to Raise Rates

Pound Rises to 26-Year High on Speculation BOE to Raise Rates

http://www.bloomberg.com/apps/news?pid=20601102&sid=aKMWtDWvltwQ&refer=uk

By Agnes Lovasz

July 24 (Bloomberg) -- The pound rose to the highest in 26 years against the dollar on speculation the Bank of England will raise interest rates at least once more this year.

BOE Deputy Governor John Gieve today said the bank ``will do whatever is needed'' to push inflation back below its 2 percent target, which it breached for a 14th month in June. The U.K. currency rose to the strongest since May 1981 as the highest benchmark yields of any Group of Seven nation lured investors.

``We seem to be living in an environment where if someone has higher rates, their currency strengthens,'' said Steven Barrow, chief currency strategist at Bear Stearns Intl. Ltd. in London. ``The fundamental backdrop is still pretty positive for the U.K. economy.''

The pound rose to $2.0623 by 4:54 p.m. in London, after earlier gaining to as high as $2.0654, and from $2.0593 late yesterday. The U.K. currency fell to 67.10 pence per euro from 67.04 yesterday.

Raising interest rates too slowly ``could compound the problems'' of inflation, Gieve said in a speech in London. At the same time, he said ``it's likely that rates are now on the restrictive side,'' suggesting they're getting to the point where they may affect economic growth.

The pound may rise to as high as $2.0685 in coming days, according to charts used to gauge price trends.

Britain's currency is being supported at $2.0545 to $2.0570 and ``is making rapid progress toward the $2.0670 to $2.0685'' level, said Steven Merrigan, a technical strategist in London at Royal Bank of Scotland Group Plc.

Paring Gains

The pound erased earlier gains versus the euro after a survey by the Confederation of British Industry showed U.K. factory orders declined in July and that manufacturers are the least confident they've been in seven months that they can raise prices.

An index of orders dropped to minus 6, the lowest since January, and a gauge of average prices in the next three months slipped to 11, from 16 in June, the U.K.'s biggest business lobby said today.

Futures traders increased to a record bets that the pound will rise against the U.S. dollar, figures from the Washington- based Commodity Futures Trading Commission released July 20 show.

Net longs, the difference between the number of wagers by hedge funds and other large speculators on an advance in the pound, compared with those on a drop, totaled 98,366 on July 17. That's the highest since Bloomberg began compiling the data in October 1993 and compares with 88,531 a week earlier.

`Momentum Intact'

``With each fresh daily high comes confirmation that current upside momentum remains intact, meaning that longs are not being stopped out,'' Ian Gunner, head of foreign-exchange research at Mellon Bank NA in London, wrote in a note to clients.

Traders of interest-rate futures are betting on a quarter- point rate increase to 6 percent by year-end and have partly priced in a second move. Policy makers next meet Aug. 2 to set borrowing costs.

The implied yield on the December interest-rate futures contract rose 2 basis points today to 6.30 percent, 14 basis points higher than at the end of May. The contract settles to the three-month London inter-bank offered rate for the pound, which has averaged about 15 basis points more than the central bank's key rate for the past decade.

By contrast, Fed funds futures give odds of 74 percent on the U.S. holding rates at 5.25 percent for the rest of this year and a 26 percent chance of a quarter-point rate cut.

U.K. bonds advanced on the lingering subprime concerns. The yield on the 10-year gilt fell 1 basis point to 5.31 percent. The price of the 4 percent bond due September 2016, which moves inversely to the yield, rose 0.06, or 60 pence per 1,000-pound ($2,062) face amount, to 90.65.

Ten-year U.K. government notes yielded 36 basis points more than U.S. Treasuries with a similar maturity, compared with 4 basis points at the start of the year.