Bloomberg.com: Pound Has Biggest Weekly Gain This Year Against Dollar on Rate

By Kim-Mai Cutler

The British pound had its biggest weekly gain this year against the dollar, rising to a 26-year high, on growing speculation the Bank of England won't cut interest rates this year.

The U.K. currency climbed for a seventh day, its longest winning streak in almost a year, as traders bet the central bank will keep rates at a six-year high next week. The Federal Reserve lowered its benchmark a quarter point two days ago, widening the difference between the U.S. and U.K. key rates.

``Very, very negative U.S. dollar sentiment paired with a solid performance from the U.K. has been the recipe for these gains,'' said Nick Bennenbroek, head of currency research in New York at Wells Fargo & Co. ``You wouldn't expect to see a rate cut from the Bank of England until next year.''

The British currency was at $2.0892 as of 6:10 p.m. in London, from $2.0801 yesterday. Earlier, it rose to $2.0896, the strongest since May 11, 1981. Against the euro, the pound slipped to 69.49 pence, from 69.34 pence. Wells Fargo forecasts the pound will fall to $2.03 by the end of the year.

The U.K. central bank has raised the cost of borrowing by a quarter percentage point three times this year to control inflation in Europe's second-biggest economy. It will keep the rate unchanged at 5.75 percent when it next meets on Nov. 8, according to 57 of 60 economists surveyed by Bloomberg News.

`Dizzying Heights'

``The pound has reached new, ever-more dizzying heights,'' Paul Robinson, a currency strategist at Barclays Capital in London, wrote in a report today. ``The last time it was at these levels was in the early leadership days of Margaret Thatcher and Ronald Reagan. Momentum remains behind the pound.''

The pound, which rose almost 1.8 percent against the dollar this week, the most since December 2006, will strengthen to $2.07 in one month, compared with a previous prediction of $2.04, Barclays's Robinson said today. It will then fall to $2.04 in three months and $1.99 in six months, he said.

The median of 42 forecasts compiled by Bloomberg is for the pound to end the year at $2.05 before dropping to $2.01 by the end of the first quarter.

The implied yield on the three-month U.K. December interest- rate futures contract rose 5 basis points today to 6.22 percent. The yield on the March 2008 contract climbed 1 basis point to 5.90 percent. The contracts settle to the three-month London interbank offered rate for the pound, which has averaged 16 basis points more than the central bank's key rate over the past 10 years and 72 basis points more in the past three months.

``Sterling looks fairly firm,'' said Steve Barrow, chief currency strategist at Bear Stearns Cos. in London. ``Markets also backed away from the idea of near-term rate cuts in the U.K.''

Gilts Recover

Gilts recouped losses from mid-week as financial stocks led declines in equity markets, spurring safe-haven buying of government debt.

The FTSE 100 Index declined 0.8 percent. Barclays Plc and Royal Bank of Scotland Group Plc sank to the lowest in more than three years on concern British banks' earnings will be hurt by the credit-market turmoil.

``It's a financial story built on rumors and speculation of further losses at banks, with some in the U.K. involved,'' said Karsten Linowsky, a fixed-income strategist at Credit Suisse in Zurich. ``It's giving a strong bid in the gilt market.''

The benchmark 10-year note gained, with the yield falling 5 basis points to 4.87 percent. The price of the 4 percent security due September 2016 was at 93.81. Two-year yields fell 8 basis points to 5 percent.

To contact the reporter on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net