Pound Approaches 3 1/2-Year High Versus Euro On Spanish Concern

The pound approached a three-and-a- half-year high against the euro after Spain said it may need to sell bonds for a banking rescue, increasing demand for alternatives to the 17-nation shared currency.
The pound extended its 4.3 percent advance against the euro this year as speculation that Greece may leave the currency bloc bolstered the appeal of British assets as a haven. Sterling rose against the yen after an index of U.K. retail sales climbed to its highest level in more than a year in May. The data followed a report last week that showed the U.K.’s double-dip recession was deeper than initially estimated. Gilts were little changed.
“The pound is regarded by continental investors as a relative safe haven,” amid Europe’s turmoil, said Michael Derks, chief strategist at FXPro Financial Services Ltd. in London. “The numbers coming out of the U.K. have been a bit discouraging but that’s not limiting the currency at the moment. Gilts will continue to attract strong demand from investors who are keen to diversify out of local currencies.”
Sterling was little changed at 79.97 pence per euro at 12:29 p.m. London time, after reaching 79.51 pence on May 16, the strongest level since November 2008. It was also little changed at $1.5678, and appreciated 0.1 percent to 124.79 yen.
Derks said the pound may appreciate to 75 pence per euro within three or four months.
Spanish Recapitalization
A spokesman for the Spanish economy ministry said the nation’s preferred option for raising funds to recapitalize Bankia group is via debt markets. Spain considers that using treasury bonds instead of cash to recapitalize Bankia is now a “marginal” option, the spokesman said.
The pound has appreciated 3 percent this year, the best performer of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar advanced 2 percent and the euro dropped 1.8 percent.
Wolseley Plc (WOS), a U.K.-headquartered plumbing- and heating- products supplier, said today that the stronger pound is hurting its earnings. “If current rates apply throughout the period then fourth-quarter profit growth will be adversely impacted” as it repatriates earnings from the euro region, the company said in a statement, referring to the three months through the end of July.
Ten-year gilts were little changed after Bank of England policy maker Ben Broadbent said the decision not to increase stimulus this month was justified by the outlook for inflation. Loosening policy again “remains a possibility” if needed to counteract threats from the euro-area debt crisis, he said in an interview with Bloomberg Television’s Linda Yueh in London.
Inflation Forecast
“We still anticipate a decline” in inflation, “but it looks to be taking slightly longer than we had first thought it would,” Broadbent said. “My answer to the questions as to why policy didn’t change in May: the forecast didn’t warrant it.”
The yield on 10-year bonds slipped was at 1.76 percent. It reached an all-time low of 1.738 percent on May 24. The price of the 4 percent bond maturing in March 2022 was 119.985.
A gauge of annual U.K. sales growth jumped to 21, the highest reading since April 2011, from minus 6 the previous month, the Confederation of British Industry said today. Data last week showed the U.K. contracted a revised 0.3 percent in the first quarter, deeper than an initial estimate of 0.2 percent.
An index of U.K. consumer confidence fell to minus 32 in May from minus 31 in April, economists forecast before a report to be published by GfK NOP Ltd. on May 31. A U.K. manufacturing index released on June 1 will show output shrank for the first time since December, according to a separate survey.
To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net


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