Thursday, May 26, 2011

Pound Gains to a Two-Month High Against Euro; IMF May Not Give Greece Aid

By Emma Charlton - May 26, 2011 11:37 PM GMT+0800

The pound reached an 11-week high against the euro after a European Union policy maker said the International Monetary Fund may not give Greece its next portion of aid, boosting the relative appeal of the U.K. currency.

Britain’s pound appreciated to the highest in two weeks versus the dollar after a report showed the U.S. economy grew less than economists forecast. A gauge of U.K. consumer-services companies dropped to minus 23 in the three months through May from minus 11 in the quarter through February, data showed today. The Bank of England left borrowing costs at a record low of 0.5 percent this month because some policy makers said an increase in interest rates might hurt consumer confidence.

“We’re seeing these comments come out, and that’s weakening the euro against the pound,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “There is still nervousness around in the market with respect to the dollar and anything that is to do with the economic outlook.”

Sterling gained 0.4 percent to 86.26 pence per euro as of 4:36 p.m. in London, after reaching 86.11 pence, the strongest since March 11. It appreciated 0.5 percent to $1.6348, after touching $1.6377, the most since May 12. It was 0.4 percent weaker at 132.93 yen.
‘IMF Rules’

“There are specific IMF rules and one of those rules says that IMF can only take action when the refinancing guarantee is given over 12 months,” Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said today at a conference. “I don’t think that the troika will come to the conclusion that this is given,” he said, referring to the representatives from the IMF, European Central Bank and European Commission who assess Greece’s progress.

The dollar dropped against the yen and euro as data showed the U.S. economy grew at a 1.8 percent annual rate in the first quarter, less than the 2.2 percent forecast by economists in a Bloomberg survey.

The pound weakened against the euro earlier today after the consumer-services report, which showed a gauge of U.K. companies such as hotels and restaurants, fell to the lowest since November 2009.

U.K. central bank officials are locked in a debate over whether to tighten monetary policy after inflation accelerated to 4.5 percent in April, the fastest since 2008. While the European Central Bank and Sweden’s Riksbank have already started raising rates, Bank of England Governor Mervyn King says it’s too soon because the recovery remains weak. Advocates of a rate increase say the price surge risks becoming embedded in the economy unless policy makers act.

U.K. Exports

The pound strengthened against the dollar and the euro yesterday as a report showed U.K. exports helped the economy resumed growth in the first quarter, outweighing the biggest slump in consumer spending in almost two years.

Sweden’s SEB AB advised selling the pound against the euro, saying the Bank of England won’t be able to raise interest rates without harming exports that boost the economy.

“Yesterday’s gross domestic product report underlines that a hike from the BOE is impossible within a foreseeable future,” Richard Falkenhall, a Stockholm-based currency strategist, wrote in an e-mailed note today. “Higher rates would probably strengthen the pound, at least short term, and hurt the only part having a positive impact on growth -- external demand. Domestic demand is extremely weak.”

U.K. government bonds were little changed, with the yield on the 10-year gilt down one basis point to 3.32 percent and the two-year note yield at 0.93 percent.

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