|
British sterling pound is third most reserve currency Original Source Link: (May no longer be active)
http://www.bloomberg.com/apps/news?pid=20601102&sid=aiQTuYRHklSA&refer=ukhttp://www.bloomberg.com/apps/news?pid=20601102&sid=aiQTuYRHklSA&refer=uk
Pound Posts Biggest Yearly Gain Since 1990 on Reserves, Rates
By Anchalee Worrachate and Aaron Pan
Dec. 30 (Bloomberg) -- The pound advanced by the most this year since 1990 as it became the world's third-most popular reserve currency and the Bank of England lifted interest rates to their highest in five years.
Britain's currency rose 14 percent this year versus its U.S. counterpart after the central bank unexpectedly raised borrowing costs in August and lifted them again last month. The pound has also gained against 13 of the 16 most active currencies tracked by Bloomberg and is now 4 cents shy of the $2 milestone, which it last touched 14 years ago.
``There are still inflationary pressures in the U.K. economy and most expect the Bank of England to raise rates again in the first quarter of next year,'' said Harriett Baldwin, head of currencies at JP Morgan Asset Management in London. ``We're at the higher end of the range for sterling-dollar, which isn't to say we aren't going to get to $2 per pound.''
Against the dollar, the pound ended the year at $1.9569 in London from $1.7187 on Dec. 30. This year's gain is the biggest since 1990, when the currency surged 19 percent versus the dollar. The pound gained for a second year versus the euro, and closed the year at 67.39 pence from 68.85 at the end of 2005.
Two-year gilts, among the most sensitive securities to interest-rate expectations, dropped this year by the most since 1999. The yield on the two-year note rose 101 basis points in 2006 to 5.21 percent. The 10-year gilt yield climbed 62 basis points to 4.74 percent.
Higher Borrowings
The pound may be buoyed by a central bank report that showed Britons' borrowings against the value of their home climbed to 11.79 billion pounds in the third quarter from a revised 11 billion pounds in the second quarter.
The central bank said Nov. 9 it expects inflation to ``rise further above target in the near term, but then fall back as energy and import price inflation abate.''
Bets by traders on a further interest-rate increase by the Bank of England are also helping boost the pound.
Interest-rate futures trading shows investors expect the bank to lift rates once more by the end of the first quarter next year. The implied yield on the March 2007 contract was at 5.45 percent, a gain of 10 basis points this month. The contracts settle to the three-month London inter-bank offered rate for the pound, which averaged about 15 basis points more than the benchmark rate for the past decade.
``We continue to look for a February hike of 25 basis points, and data on retail sales and earlier upside surprises on inflation have both increased the probability we'll be right,'' said Daragh Maher, a currency strategist in London at Calyon, the investment banking unit of Credit Agricole SA. ``A rate hike is already virtually priced in.''
Higher Returns
The pound has also gained as central banks have added more of the currency to their reserves this year to take advantage of the higher returns on assets denominated in the U.K. currency.
The pound surpassed the yen in December as the world's third-most popular reserve currency, behind only the dollar and the euro. Central banks lifted holdings of pounds to $115 billion, or 4 percent of total reserves at the end of March, the highest since at least 1999, International Monetary Fund data showed in June.
Europe's second-largest economy grew at the fastest annual pace in two years in the third quarter and has shown few signs of slowing even after the two interest-rate increases. Rising retail sales, surging house prices and a recovery in manufacturing means the economy will exceed the government's growth forecast of between 2 and 2.5 percent this year, Chancellor of the Exchequer Gordon Brown said Nov. 27.
Pound at $2
Analysts are expecting the U.K. currency to reach $2, a level it last reached 14 years ago, buoyed by a weaker dollar that has been hurt on speculation Federal Reserve policy makers may start lowering interest rates next year.
That speculation may be reined in after reports this week suggested the U.S. economy is picking up after two quarters of slowing growth.
The pound on Dec. 1 touched its highest since September 1992, when speculators led by billionaire investor George Soros drove the U.K. currency out of Europe's system of linked exchange rates. Britain's withdrawal from the European Exchange Rate Mechanism triggered a 20 percent drop in the pound over the following three months and Soros made $1 billion from his wager, earning the nickname ``the man who broke the Bank of England.''
``Dollar weakness manifests itself through the pound more than the euro because there is no verbal intervention factor in the U.K.,'' said Neil Jones, head of European hedge fund sales in London for Mizuho Financial Group Inc., Japan's second-biggest lender. ``We are looking for the pound to hit $2.''
Last Updated: December 30, 2006 02:39 EST
|
|
