Pound advances versus dollar as Scotland votes on independence

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(Sept 18): The pound strengthened versus the dollar as the Scottish electorate voted on whether to end its three-century-old union with the U.K.

Sterling appreciated versus most of 16 major peers as opinion polls suggested the Scottish race is too close to call. Gauges of future price swings for the U.K. currency have surged in recent weeks as investors grappled with the implications of a potential “yes” vote, while options on the pound versus the euro yesterday were the most bearish since 2008. U.K. government bonds declined, pushing the 10-year yield to a six-week high.

“I wouldn’t be surprised if we do see sterling firming up,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. “The recovery over the past week following some sharp declines has been a corrective move, which is consistent with a cautious approach as we go into the vote. I expect some volatility overnight as the results come in, purely by the nature of which they are going to be released region by region, as it doesn’t look like there are going to be any large-scale exit polls.”

The pound gained 0.2 percent to $1.6308 at 10:47 a.m. London time after climbing to $1.6358 yesterday, the most since Sept. 4. The U.K. currency appreciated 0.1 percent to 78.97 pence per euro after touching to 78.81 pence, the strongest level since July 23.

Overnight volatility for the pound versus the dollar rose to as much as 33 percent, the highest level since May 7, 2010, the day after the last general election, which resulted in a hung parliament and led to a coalition government.

Dollar Comparison

Sterling strengthened 0.6 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The euro dropped 0.7 percent, while the dollar gained 3.5 percent.

Benchmark 10-year gilt yields rose three basis points, or 0.03 percentage point, to 2.54 percent, having touched 2.56 percent, the highest level since Aug. 6. The 2.75 percent bond maturing in September 2024 fell 0.23, or 2.3 pounds per 1,000- pound face amount, to 101.810.

Gilts returned 6.5 percent this year through yesterday, Bloomberg World Bond Indexes show. German securities also gained 6.5 percent, while U.S. Treasuries earned 3.1 percent.