Pound Strengthens Against Dollar After Construction Growth Beats Estimates

By Garth Theunissen - Mar 2, 2011 8:47 PM GMT+0800

The pound strengthened against the dollar as an industry report showed U.K. construction grew at the fastest pace in eight months in February, adding to signs the economy may withstand a rise in the benchmark interest rate.

Sterling also advanced versus a basket of nine developed- nation currencies according to Bloomberg Correlation-Weighted Currency Indexes. A gauge of construction activity measured by a survey of purchasing managers rose to 56.5 from 53.7 in January, Markit Economics Ltd. and the Chartered Institute of Purchasing and Supply said today in London. The median estimate in a Bloomberg survey was for a reading of 52.8.

“The market is pricing in higher rates and certainly today’s data will encourage those that believe monetary policy needs to be tightened to control inflation -- that’s why sterling is being bought,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London.

The pound rose 0.2 percent to $1.6301 as of 12:34 p.m. in London, and gained 0.4 percent to 133.64 yen. Britain’s currency weakened 0.1 percent to 84.78 pence per euro.

Sterling has advanced 4.5 percent against the dollar this year amid mounting speculation that the Bank of England will raise interest rates from a record low 0.5 percent to quell inflation. Consumer-price growth accelerated to an annual 4 percent in January, the 14th consecutive month above the government’s 2 percent target.

MPC ‘Hawks’

Policy maker Andrew Sentance has led calls for the central bank to raise its benchmark interest rate since June and last month voted for a 50 basis-point increase. Minutes from the bank’s Feb. 10 meeting showed policy maker Spencer Dale joined Sentance and Martin Weale in voting for higher borrowing costs.

Dale and Weale favored a 25 basis point rise. The next rate decision is scheduled for March 10.

“The hawks on the MPC will view today’s data as a sign that the economy will be able to absorb higher rates,” said Jones. Market expectations for higher interest rates are likely to boost the pound to about $1.6750 and between 80 and 82 pence per euro by June, Jones added.

Money markets signal policy makers will probably raise the key rate by about 63 basis points by year-end, according to sterling overnight index average forwards, Tullett Prebon Plc data show. So-called Sonia rates indicate an increase of about 20 basis points in May.

‘Self-Defeating’ Gesture

Increasing the benchmark interest rate as a gesture in the fight against inflation would be “self-defeating,” Bank of England Governor Mervyn King told lawmakers in London yesterday. Still, King said he expects to have to write letters to Chancellor of the Exchequer George Osborneexplaining why inflation remains above the government’s 3 percent upper limit “through the rest of this year.”

King was forced to write a fifth letter after the January inflation data was released on Feb. 15.

Two-year yields, typically more responsive to short-term rate expectations, slid one basis point to 1.38 percent. Ten- year gilt yields were little changed at 3.62 percent.

To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net