The pound gained for a third week against the euro as investors favoured British assets after European Union leaders struggled to resolve the region's sovereign debt crisis.
Sterling reached its strongest level since January versus the 17-nation euro while gains by UK gilts pushed the 10-year yield below 2 per cent for the first time. Europe's sovereign debt crisis may hurt the real economy and the outlook for financial stability has worsened, Mervyn King, vice chairman of the European Systemic Risk Board, said on Thursday.
"Sterling is going to benefit immensely as a new breed of safe haven," said Elizabeth Gregory, a market strategist at Swissquote Bank in Geneva. "The UK and Scandinavian countries are among the better insulated. The out-performance of the pound is a sign of bigger things to come."
The pound advanced 0.6 per cent to 83.43 pence per euro in London on Friday, pushing its gain during 2011 to 2.8 per cent. It was 0.5 per cent stronger at $1.5624, little changed since December 31.
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UK gilts rose as data added to signs the economic recovery may stall, strengthening the case for the Bank of England to add to asset purchases next year.
The yield on 10-year gilts was at 2.04 per cent on Friday, after being as low as 1.996 per cent, the least since Bloomberg started tracking the data in 1989.