Jan. 8 (Bloomberg) -- The pound gained from a five-month low against the dollar after an industry report showed house prices unexpectedly rose for the first time in four months in December, prompting investors to reduce bets on lower interest rates.
The pound also climbed the most versus the yen in a month as gains in global stocks encouraged investors to borrow cheaply in Japan and buy higher-yielding currencies. The Bank of England will refrain from a quarter percentage point cut to 5.25 percent at its Jan. 10 meeting, according to the median forecast of 50 economists surveyed by Bloomberg News.
Today's ``HBOS house prices were quite a bit stronger than anticipated, which should provide some support,'' said Ian Stannard, foreign-exchange strategist at BNP Paribas SA in London. ``Sterling's basically taking a breather. We could even rise back toward the $2 area in the course of the next few days.''
The U.K. currency rose to $1.9762 by 2:45 p.m. in London, from $1.9703 yesterday, when it slipped to the lowest since Aug. 17. Against the yen, it gained as much as 1 percent, the most since Dec. 12, before trading at 216.12, from 215.11.
The pound was also at 74.51 pence per euro, from 74.61 pence, after dropping to a record low of 74.92 pence on Jan. 4. It could strengthen to 73-74 this week, Stannard forecasts.
The average cost of a U.K. home increased 1.3 percent from a month earlier, HBOS Plc, the U.K.'s biggest mortgage lender, said today. Economists had expected house prices to decline 0.5 percent, according to a Bloomberg survey, after sliding a revised 1.3 percent in November. Costs fell 0.8 percent in the quarter through December from the previous three-month period, HBOS said.
Stocks Rally
European stocks snapped four days of losses, and U.S. Treasuries fell for the first time in almost two weeks, signaling increased appetite for higher-yielding investments, such as carry trades. Europe's Dow Jones Stoxx 600 Index added 0.5 percent, advancing for the first time in five days.
In carry trades, investors borrow at the low interest rates in Japan or Switzerland and convert the proceeds into a currency, such as the pound, they can lend out for a higher return. They earn the spread between the borrowing and lending rates, taking the risk currency moves will erase their profit. Japan's main lending rate of 0.5 percent is the lowest among industrialized economies.
A sustained advance by the pound may be limited as most data still point to Europe's second-biggest economy slowing. The British Retail Consortium said today shop sales rose in December at the slowest pace since March 2006. Revenue at stores open at least 12 months increased 0.3 percent from a year earlier.
Confidence Falls
Business confidence for the next three months fell to the lowest since January 2006, accountancy firm BDO Stoy Hayward said yesterday, while the Confederation of British Industry said U.K. banks' earnings may be limited this year by increased funding costs and late loan payments after a record drop in revenue in the three months to December.
Economists in a Bloomberg survey predict the pound will fall to $1.97 by June and to $1.92 by the end of the year.
Gilts declined the most in almost two weeks today on reduced demand for the safety of government debt.
The yield on the two-year note advanced as much as 5 basis points, the most since Dec. 27, and was recently 2 basis points higher at 4.28 percent. The price of the 5.75 percent security due December 2009 slipped 0.05, or 50 pence per 1,000-pound face amount, to 102.67. Ten-year yields gained 3 basis points to 4.43 percent. Yields move inversely to bond prices.
Index-Linked Sale
Gilts stayed lower after a sale of inflation-protected government bonds due 2047 drew weaker demand than at the previous auction in November.
The Debt Management Office sold 2.25 billion pounds of 0.75 percent index-linked bonds due 2047, drawing bids of 1.39 times the amount of securities on offer. That compared to a so-called bid-to-cover ratio of 2.42 times at the last auction.
The implied yield on the September interest-rate futures contract added 1 basis point today to 4.91 percent.
The yield has fallen 13 basis points since the U.K. central bank lowered its main rate a quarter-point to 5.5 percent on Dec. 6 to shore up an economy affected by fallout from the U.S. subprime-mortgage crisis
