British Pound Strengthens Against Dollar After Prudential Scraps AIG Deal

Date: Wednesday, June 2, 2010
Author: Bloomberg

The pound rose to its strongest level in almost three weeks against the dollar after Prudential Plc abandoned its $35.5 billion takeover of American International Group Inc.’s main Asian unit.

Britain’s currency was little changed against the euro, after appreciating past 83 pence per for the first time since Dec. 1, 2008, as reports showing increases in mortgage approvals and construction added to signs the U.K.’s economic recovery is gathering pace. Scrapping the AIG deal means London-based Prudential will drop a $21 billion rights offer, a record to fund a takeover. Government bonds were little changed as the U.K. sold 4.25 billion pounds of notes maturing in five years.

The takeover’s collapse “is sterling plus, the implication being that there won’t be sales of sterling to buy foreign currencies,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “The housing market continues to benefit from foreign inflows.”

The pound advanced 0.3 percent to $1.4701 as of 10:50 a.m. in London, after trading at $1.4771, the strongest level since May 13. It was at 83.42 pence per euro, after strengthening to 82.80 pence.

The yield on the 10-year gilt was at 3.57 percent, while the yield on the two-year note rose two basis points to 0.91 percent. The five-year yield held at 2.30 percent.

The Treasury auctioned 2.75 percent notes at an average yield of 2.274 percent, the Debt Management Office said today in a statement. Investors bid for 2.34 times the securities offered, compared with a bid-to-cover ratio of 2.06 times at a sale in November. The U.K. auctions 2 billion pounds of 2034 bonds tomorrow. Britain plans to issue 185.2 billion pounds of gilts this fiscal year as it seeks to plug the biggest budget deficit among the Group of Seven nations.

‘Heavy Financing’

Prudential’s aborted deal to buy AIA Group Ltd. will cost it about 450 million pounds, the insurer said in a statement.

“Pound outperformance is all due to expected flows from the unwinding of currency hedges put in place several months ago,” said Sue Trinh, a senior strategist at RBC Capital Markets in Hong Kong.

U.K. lenders granted 49,871 loans to buy homes in April, the most since December, the Bank of England said today in London. The median forecast of 19 economists in a Bloomberg survey was for a gain to 49,500. A gauge of building activity, based on a survey of purchasing managers, jumped to 58.5 last month, from 58.2 in April, Markit Economics and the Chartered Institute of Purchasing and Supply said in a statement. Economists surveyed by Bloomberg predicted a drop to 58.

Britain’s currency has climbed 6.3 percent against the euro this year as reports signaled the U.K.’s recovery from the worst financial crisis since World War II is accelerating. The 16- nation currency has weakened as economies in the region falter amid the sovereign-debt crisis.

Gilts returned 4.4 percent this year, compared with a 6.5 percent increase for German bonds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.