British Pound Passes the Yen Among Currency Reserves (Update4) July 10 (Bloomberg) -- Central banks from Oman to Ukraine are increasing their holdings of British pounds, contributing to the currency's biggest first-half gain against the dollar in 16 years. National banks boosted holdings of pounds to $115 billion, or 4 percent of total reserves at the end of March, the most since the International Monetary Fund began publishing data in 1999. The increase is helping Britain's economy by holding down government bond yields. ``The pound is very attractive because it has a good return on interest rates, '' Hamoud Al Zadjali, president of the Central Bank of Oman, said in a telephone interview last week. Oman holds 5 percent of its $4.7 billion of reserves in pounds, he said. The pound's share of reserves has risen from 3.7 percent at the start of last year and 2.7 percent in March 2004. Britain's currency surpassed the yen in December as the third-most popular after the dollar, which makes up 66.3 per- cent and the euro, at 24.8 percent. The IMF includes data from 114 countries that hold $4.4 trillion worth of foreign currencies. The 7.4 percent rally from January through June was the best first half since ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ the pound gained 19.7 percent in 1990. That surge was sparked by the decision ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^(按:難怪我預測失準) to tie it to European Union currencies, including Germany's deutschemark and the French franc. Soros Profits Two years later, billionaire George Soros and other speculators bet Prime Minister John Major would pull out of the European Monetary System. They pressured the Bank of England to abandon the link and triggered a 20 percent drop over the next three months. Soros made $1 billion for his Quantum fund on the wager. Investors, traders and strategists surveyed by Bloomberg are predicting more gains. Fifty-six percent of participants in a July 7 survey said the pound will rise in the coming week. Seventeen percent recommended selling the currency and 27 percent see little change. The pound gained 0.25 percent last week against the dollar to $1.8516, using London prices. It traded at $1.8426 at 1 p.m. in London today. The survey also showed 61 percent of the 56 people polled advised selling the dollar against the euro, up from 50 percent the week before. Fifty-seven percent urged selling it against the yen, up from 52 percent. The survey anticipated last week's dollar decline. It has forecast the dollar's direction in 27 of the past 52 weeks against the euro and in 30 versus the yen. The euro gained 0.15 percent versus the dollar last week to $1.2810. The dollar fell 0.33 percent against the yen to 114.04. Emerging Markets Demand for pounds is being propelled from central banks, mainly in developing countries. Emerging-market countries including China and oil exporters such as Russia now hold $2.9 trillion in reserves, about two thirds of the total. They accounted for almost all of the growth since 2004, according to an analysis by Deutsche Bank AG. The pound is attractive in part because of Prime Minister Tony Blair's success in slowing inflation and spurring growth. Consumer price gains have averaged 1.4 percent since May 1997, when Blair took office. The inflation rate averaged 4 percent in the five previous years. Economic growth of 2.3 percent in the first quarter was faster than the average for the 12 nations sharing the euro. Central-bank purchases of the pound reduced 10-year U.K. bond yields by as much as 150 basis points from June 2004 through the end of last year, said Gertjan Vlieghe, an economist at Deutsche Bank who worked at the Bank of England for seven years. ``We have seen a big increase in central bank buying of sterling, and those purchases have helped keep yields low.'' U.K. 10-year bond yields fell to 4.64 percent last week from 4.70 percent the week before. In the U.S., 10-year Treasury notes yield 5.13 percent. Ukraine, Latvia, Poland ``We will increase our reserves in pounds,'' Mykola Melnychuk, treasurer at Ukraine's central bank in Kiev, said in a phone interview last week. The size of Britain's economy gives the pound ``attractiveness,'' he said. Ukraine had the equivalent of $16.8 billion of reserves as of April. Latvia may buy pounds after it joins the euro, Raivo Vanags, head of market operations at the Latvian central bank, said in an interview from Riga, the capital. Latvian Economy Minister Aigars Stokenbergs said last month 2010 is a ``realistic'' target for joining. Poland has increased its share of reserves in pounds to about 10 percent from 9.6 percent in 2004, said Izabela Swiderek, a spokeswoman at the National Bank of Poland in Warsaw. Brazil, South Korea Some of the biggest central banks said they aren't increasing their bets on the U.K. currency. Japan, which has the world's second-largest reserves after China, ``does not have any plan to change'' the share of its holdings in dollars, Masatsugu Asakawa, director of the Ministry of Finance's foreign-exchange division, said in an interview last week from Tokyo. ``We haven't been seeking to diversify into other currencies,'' said Yoon Man Ha, director general of the Bank of Korea's foreign-currency bureau in Seoul. Brazil wants its central bank reserves to mirror the composition of its international bonds, leaving the pound with a ``small'' role, said Jocimar Nastari, a spokesman at Brazil's central bank in Brasilia. Higher interest rates in the U.K. have made the pound attractive to some industrialized countries. The Bank of England's benchmark rate is 4.5 percent, compared with the European Central Bank's 2.75 percent. ``I doubt we've seen the peak in central bank buying yet,'' Michael Saunders, London-based chief economist for Western Europe at Citigroup Inc., said in an interview last week. Nordic Holdings Iceland has maintained the pound at 15 percent of its foreign-exchange reserves over ``the past few years,'' Ingimundur Fridriksson, assistant governor of the Sedlabanki in Reykjavik, said in an interview last week. The share is triple the amount the bank holds in yen, he said. Sweden's allocation to pounds is 10 percent, more than double the average for the IMF's members, central bank data show. Norway's Norges Bank dedicates 9.7 percent of its reserves to pounds, up from 9.4 percent in 2004, said Bjorn Taraldsen, deputy head of staff in investment management. The currency's heyday came when Queen Victoria ruled an empire that stretched from India and Southeast Asia to Egypt and the Caribbean. It was the unit of trade for about 60 percent of goods and services exchanged around the world from 1860 to 1914, according to Barry Eichengreen, a professor of economics at the University of California, Berkley. The pound was displaced as the global standard after World War II, Eichengreen said. To contact the reporter on this story: Rodrigo Davies in London at [email protected] Last Updated: July 10, 2006 08:12 EDT --

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