Bloomberg.com: Currencies

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Bloomberg.com: Currencies

U.K. Pound Rises to Highest Since 1981 on Interest-Rate Outlook
By Kim-Mai Cutler and Aaron Pan

Oct. 31 (Bloomberg) -- The pound rose to its highest against the dollar since 1981 on speculation the U.S. Federal Reserve will cut interest rates today, widening the difference in borrowing costs with the U.K.

Bank of England policy maker David Blanchflower said the bank is taking a `watch and see' approach on rates and his colleague Kate Barker has signaled it isn't ready to cut them. Futures traders are betting U.S. borrowing costs will be reduced.

``Sterling has continued to be well-supported by ongoing pressures on the U.S. dollar,'' said Jeremy Stretch, a senior currency strategist at Rabobank Groep. ``The market has scaled back more exaggerated hopes of rate cuts from the Bank of England.''

The pound rallied to as high as $2.0742, the strongest against the dollar since May 20, 1981. It traded at $2.0717 as of 1:13 p.m. in London, from $2.0677 late yesterday. Against the euro, the pound traded at 69.73 pence, from 69.80.

Stretch predicts the pound will end the year at $2.08, higher than the $2.03 median forecast of 43 strategists and economists compiled by Bloomberg.

The U.K. currency pared gains after the Commerce Department reported that U.S. economic growth unexpectedly accelerated in the third quarter to 3.9 percent as increases in exports, consumers spending and investment made up for a housing slump.

In the U.K., home prices rose at the fastest pace in four months in October, according to the Nationwide Building Society, the country's fourth-biggest mortgage lender. The average cost of a British home rose 1.1 percent from September, boosting the annual rate of increase to 9.7 percent, according to Nationwide.

Consumer Confidence

U.K. consumer confidence fell to a seven-month low this month as shoppers became more reluctant to make purchases, a poll for the European Commission showed. A gauge of sentiment fell one point from September to minus 8, London-based market researcher GfK NOP Ltd. said, citing its poll of 2,000 people.

Blanchflower said the U.K. economy was showing `signs of softness' and that the bank would adopt a ``watch and see'' approach toward interest rates, according to the Lancashire Evening Post newspaper.

The U.K. central bank has raised the benchmark interest rate three times this year. The increases, the latest in July, took the rate to the most in six years and the highest among the Group of Seven nations.

Bank of England Governor Mervyn King said on Oct. 9 policy makers are gauging the effects of higher credit costs on the economy while keeping up their guard on inflation.

Consumer prices rose 1.8 percent in September from a year earlier, the same as August, and below the central bank's 2 percent target for a third month, the Office for National Statistics said in London on Oct. 16.

``There's still more room for the pound to rise against the dollar,'' said Akio Shimizu, chief manager of foreign-exchange trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``Inflationary pressure in the U.K. means interest rates aren't likely to fall soon. In contrast, the Federal Reserve may lower rates a few more times this year.''

To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net ; Aaron Pan in Hong Kong at Apan8@bloomberg.net