Pound Gains Versus Dollar as Money Supply, Sales Growth Quicken

By Lukanyo Mnyanda

Sept. 20 (Bloomberg) -- The pound rose against the dollar after a report showed retail sales unexpectedly increased in August, making it less likely the Bank of England will cut interest rates by year-end.

The U.K. currency also pared losses against the euro, rebounding from a 17-month low, after central bank data showed money-supply growth quickened last month. Gilts trimmed earlier gains as signs the economy remains buoyant crimped demand for the safety of government debt.

``The market was vulnerable to a bounce in sterling on any good news,'' said Adam Cole, London-based head of global currency strategy at RBC Capital Markets, a unit of Canada's largest bank by assets. The data came ``in a market short of sterling, after digesting all the bad news.'' A short position is a bet a currency will weaken.

The pound rose to $2.0077 by 12:02 p.m. in London, from $2.0008 late yesterday. It traded at 69.90 pence per euro, after falling to 70 pence for the first time since April 2006, from 69.77 pence yesterday.

Retail sales rose 0.6 percent last month, the Office for National Statistics said, beating the forecast of economists surveyed by Bloomberg News, who expected them to remain flat.

M4, the broadest gauge of U.K. money supply and which measures currency in circulation and deposits at banks, rose 13.5 percent from a year earlier, the most since May, the central bank said.

The yield on the 10-year gilt fell 1 basis point to 4.98 percent, after earlier sliding to 4.97 percent. The price of the 4 percent note due 2016 rose 0.09, or 90 pence per 1,000-pound ($2,000) face amount, to 93.01. The two-year note yield was little changed at 5.16 percent.

Rate Speculation

The pound has declined more than 3 percent against the euro this month as the credit-market slump intensified, prompting investors to increase bets the central bank of Europe's second- largest economy will postpone interest-rate increases.

Annual inflation was the slowest since March 2006 last month, a government report yesterday showed, while the Federal Reserve's half-point cut this week stoked speculation the Bank of England won't be able to lift borrowing costs from a six-year high of 5.75 percent by year-end.

``In the short term, sterling is going to remain under pressure,'' said Toshi Honda, a currency strategist in London at Mizuho Corporate Bank Ltd. A rate cut is ``quite likely,'' he said, adding that ``it may take place in the first quarter of next year.''

The U.K.'s benchmark interest rate is the highest among the Group of Seven nations and compares to 4 percent for the 13 nations that share the euro.

The implied rate on the December interest-rate futures contract has fallen 26 basis points in the past week to 6.04 percent, after earlier today sliding to a four-month low of 5.98 percent.

The contract settles to the three-month London interbank offered rate for the pound, which has averaged about 15 basis points more than the bank's key rate in the past decade.

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