U.K. Pound Gains Against Dollar on Interest-Rate Differential

Nov. 26 (Bloomberg) -- The pound rose against the dollar on speculation widening credit-market losses will force the Federal Reserve to cut interest rates again by year-end, while the Bank of England stays on hold.

The U.K.'s currency rebounded from near a week-low as HSBC Holdings Plc said it will bail out two structured investment vehicles by taking on $45 billion of assets to avoid a fire sale of bond holdings. Goldman Sachs Group Inc. said Europe's second- biggest bank by assets now faces $12 billion in additional writedowns for U.S. subprime-mortgage defaults.

``The U.S. is the epicenter of the sub-prime crisis, and sterling will hold its own against the dollar,'' said Neil Jones, head of European hedge-fund sales in London at Mizuho Capital Markets. ``We could see further pound strength.''

The pound rose to $2.0687 by 5:29 p.m. in London, from $2.068 on Nov. 23, and was at 71.82 pence per euro, from 71.94 pence. The U.K. currency could strengthen to $2.10 by year end, said Jones.

The Organization for Economic Cooperation and Development on Nov. 22 estimated losses from U.S. subprime foreclosures as high as $300 billion. That's on top of the more than $60 billion the world's biggest banks, brokers and insurers have announced they will write down.

U.K. 10-year government bonds erased earlier declines. The yield on the benchmark 10-year bond was little changed at 4.56 percent.

Credit-Default Swaps

The pound was also supported as an improvement in European corporate bond risk prompted investors to resume so-called carry trades, lured by the highest interest rates among the Group of Seven nations.

The risk of European companies defaulting on their debt fell, further eroding the allure for holding government bonds, which are perceived to be more secure.

Contracts on the Markit iTraxx Crossover Series 8 Index of 50 European companies with mainly high-risk, high-yield credit ratings fell 9 basis points to 366 basis points, according to Deutsche Bank AG. The benchmark for the cost of protecting bonds against default falls when perceptions of credit quality improve.

According to interest-rate futures traded on the Chicago Mercantile Exchange, investors see a 96 percent chance the Fed will lower borrowingn costs a quarter percentage point to 4.25 percent at its Dec. 11 meeting, up from 82 percent odds a month ago. The chances of a further cut to 4 percent in January were 86 percent.

The U.K.'s main interest rate is the highest among the Group of Seven nations at 5.75 percent.