RPT-COLUMN-Sterling sneaks higher as UK assets rally: Mike Dolan

By Mike Dolan

LONDON, April 30 (Reuters) - Sterling's quiet rise to a three-year high against the ailing dollar has bypassed many observers, reflecting some rare appetite for British assets and giving the Bank of England a nudge to catch up on monetary easing next week.

The big currency story of the year so far has clearly been the dollar's peculiar swoon in the face of tariff-related market stress, a critical dent in its safe-haven credentials that has raised fears of a foreign investor retreat from all U.S. assets.

The euro EUR= was the key beneficiary, emboldened by Germany's trillion euro post-election fiscal boost.

But even as the single currency's performance has leveled off this month, sterling GBP= has continued to climb against the greenback while recovering significant ground on the euro EURGBP= to boot.

So much so that sterling's real trade-weighted index against the currencies of Britain's major trading partners has climbed to a nine-year high, levels not seen since well before the 2016 referendum in which Britain voted to leave the European Union.

While currency strength per se won't be welcomed in the middle of a global trade war, sterling's climb reflects some fresh confidence in UK assets at large as well as Britain's ability to navigate the middle ground in the transatlantic trade standoff.

Underlining that, the FTSE100 index .FTSE clocked its 12th straight day of gains on Tuesday - the longest winning streak since 2016 as well. That's impressive for an index that has routinely traded inversely to sterling strength due to the heft of overseas earnings among British blue chips.

Although slightly lagging euro zone stock indexes .STOXXE, the FTSE 100 is up 4% for the year so far. And, in dollar terms, it's outperformed Wall Street's S&P 500 index .SPX by some 18% for the year to date. Even FTSE 250 midcaps .FTMC have outstripped the S&P 500 by 10% on the same basis.

Long-unloved UK stocks appear to be having a rare moment in the sun at last. So much so that the record valuation discount of the FTSE all-share index .FTAS to the MSCI World index .MIWO00000PUS of some 43% late last year has been squeezed by a whopping 10 percentage points since then.

And even the embattled UK government bond market GB10YT=RR has caught a decent bid this week, likely helped by the fact that a quarter-percentage-point BoE interest rate cut is now fully priced for next week, with a 50% chance of another by the middle of this year.

RE-LOVED UK ASSETS

The fact that the pound has strengthened into this easing expectation indicates that support is not solely based on yield levels.

Two big-picture developments may have helped considerably: hopes for some sort of bilateral trade deal with the U.S. and a potential economic and political detente with the EU.

On Tuesday, White House officials said trade talks with Britain were moving "in a very positive way". Tariff relief on autos, one of the biggest UK exports to the U.S. market, is reportedly a key part of the optimism.

And on the other side of the Atlantic, Britain put forward a broad statement of shared values with the EU that emphasizes support for Ukraine's territorial integrity, the Paris climate agreement and open and free trade, according to a draft document seen by Reuters.

The document is framed as a "geopolitical preamble" to a new strategic partnership between Britain and the EU, which both sides aim to agree to at a summit in London on May 19.

Whether these moves will have any direct effect on sentiment toward sterling and UK assets is unknown, but in a world where geographic investment preferences have been upended and a search for value - often in home markets - is underway, they help to tell a positive story on all sides.

Perhaps more than anything else, the ructions of the year so far have convinced many British investors that faraway fields are not always greener and deeply discounted assets at home may be the safest bet in a stressed world.

What the troubles for the dollar and Wall Street this year have clearly shown is that the decade of stellar U.S. outperformance was driven largely by money from Europe and largely focused on equity rather than debt.

Even a partial rebalancing of that extreme bias is providing a powerful shot in the arm for markets on the eastern side of the ocean.

The opinions expressed here are those of the author, a columnist for Reuters