Sterling gains as UK house prices rise and investors feel confident

Sterling rose broadly on Friday, bolstered by a survey showing an unexpected rise in UK house prices in April. Gains in equities and commodity prices also fuelled broad weakness in the dollar and benefited perceived higher risk currencies such as sterling. A survey by Nationwide on Friday showed UK house prices rose by 1.2 percent during April, slowing the annual rate of decline to its weakest since last August. The news renewed optimism that the UK economy is on the road to recovery, while firmer data out of Japan and Germany added weight to the more positive sentiment on the global economy as a whole, boosting equities and higher risk currencies. "The dollar is generally weaker, which has helped cable (sterling/dollar), while euro/sterling has been drifting lower on the back of the Nationwide housing data," Bank of Scotland Treasury currency strategist Naeem Wahid. The GBP/USD is currently trading at $1.6380 as of 8:40am, London Time.

U.S. manufacturing probably shrank in May at the slowest pace in eight months, a further sign that the worst of the recession may be over, economists said before a report today. The Institute for Supply Management’s factory index rose to 42, the highest level since September, according to the median forecast of 63 economists surveyed by Bloomberg News. Readings below 50 signal contraction. Other reports may show spending by consumers and construction firms dropped in April. The ISM report would reinforce regional data showing the factory industry’s contraction slowed in May. The Federal Reserve Bank of New York’s manufacturing gauge rose to the highest level since August, the Philadelphia Fed’s measure jumped to an eight-month high and the Richmond Fed’s index showed the first expansion in more than a year.
“It’s going to be slow-going,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Businesses are a little more cautious. Their outlook depends on consumer demand, and we can see consumer spending isn’t setting any records here.”

The Dollar Index dropped to the lowest this year as the U.S. government said it will own a majority of General Motors Corp. after the carmaker’s bankruptcy, increasing concern about record debt sales to fund bailout packages and economic stimulus plans. Taiwan’s dollar climbed the most since April 30 after China said manufacturing grew for a third month. The euro fell against the yen and the dollar on concern European policy makers will signal this week they plan further steps to keep down borrowing costs. “Optimism is strong,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader. “As long as global equities rise, dollar weakness will continue, benefiting higher-yielding currencies, like the Aussie,” he said, using the Australian dollar’s nickname.