UK Pound Falls Below Euro

Pound Falls to 98 Pence Per Euro for 1st Time on Housing Slump


By Matthew Brown

Dec. 29 (Bloomberg) -- The U.K. pound weakened to a record 98 pence per euro after an industry report said house prices will probably extend declines next year, boosting the case for deeper interest-rate cuts by the Bank of England.

Britain’s currency also dropped versus 14 of its 16 most- traded counterparts, falling for a second day against the Swiss franc and tumbling to a 14-year low against Japan’s yen. Property research company Hometrack Ltd. said U.K. house values slid 8.7 percent this year, led by a 10.1 percent drop in London, and that prices will “inevitably” decline in 2009.

“Parity is ever more likely” between the pound and the euro, said Daragh Maher, deputy head of global foreign-exchange strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. “If there’s going to be a turnaround in euro-sterling it needs to come from the euro.”

The pound depreciated as much as 2 percent to 98 pence per euro, its sixth straight daily drop, and was at 97.47 pence by 5:35 p.m. in London, from 96.10 pence at the end of last week. It sank 25 percent against the European common currency this year, the most since the euro was introduced in 1999.

Britain’s currency dropped as much as 1.3 percent versus the yen to 76.31 pence, the lowest since April 18, 1995, before paring declines to 76.06 pence. It slipped 2.5 percent to 1.5218 francs. The U.K. currency was little changed at $1.4573, near the lowest level in more than three weeks.

“Sterling’s had to contend with the soft house-price numbers overnight” and retailers haven’t “had a particularly good December,” said Maher.

More than 1,600 people will lose their jobs in the U.K. every day in 2009, the Daily Telegraph reported, citing a report by the Chartered Institute of Personnel and Development. A total of 600,000 face being put out of work next year, the newspaper said today.

Rate Cuts

The Bank of England cut its main interest rate to 2 percent from 5 percent this year as the British government nationalized Northern Rock Plc and Bradford & Bingley, and took stakes in Royal Bank of Scotland Group Plc, HBOS Plc and Lloyds TSB Group Plc to prop up the financial sector. The U.K. economy is in its first recession in 17 years.

“There are very few people betting against a 1:1 rate now” between the pound and the euro, said Angus Campbell, head of sales at Capital Spreads. “Expectations for further cuts in interest rates are proving a serious negative for sterling and, with a shortened week once again, it’s not long before the next meeting.”

The U.K. central bank will cut its main rate a half-point to 1.5 percent at its meeting on Jan. 8, according to the median estimate of 38 economists surveyed by Bloomberg News.

Rebound Forecast

Even after its worst-ever year against the euro, Britain’s currency may rebound in 2009 as investors bet on a recovery in the U.K. economy, according to the world’s biggest currency traders.

The pound will strengthen 14 percent versus the euro next year, according to the median forecast of 42 analysts and strategists surveyed by Bloomberg. Deutsche Bank AG, the largest trader as measured by Euromoney Institutional Investor Plc, expects a 20 percent gain. At the same time, economists surveyed by Bloomberg before a Jan. 2 industry report estimated Europe’s manufacturing industries shrank for a seventh month in December.

‘Signs of Life’

“We’ll see some signs of life in the U.K. economy sooner than we do in the euro zone,” said Henrik Gullberg, a strategist at Deutsche Bank in London. “Even though we might be far away from a rate hike in the U.K.,” it may happen “sooner in the U.K. than in the euro zone,” he said.

The European Central Bank lowered its main refinancing rate by 0.75 percentage point to 2.5 percent on Dec. 4, its biggest- ever cut, as the euro region suffered the first recession since the introduction of its common currency.

U.K. government bonds fell, pushing the yield on the 10-year gilt up five basis points, or 0.05 percentage point, to 3.10 percent. The price of the 5 percent security due March 2018 slipped 0.45, or 4.5 pounds per 1,000-pound ($1,457) face amount, to 115.07. The two-year gilt yield increased three basis points to 1.17 percent. Yields move inversely to bond prices.

Gilts declined as gains in equity markets sapped demand for the safest assets. The FTSE 100 index of leading U.K. stocks advanced 2.4 percent, the most in three weeks.