Pound Falls as Report Shows House Prices Drop Most Since 2001

By Andrew MacAskill

July 28 (Bloomberg) -- The pound fell against the euro and the dollar after a private report showed U.K. house values dropped by the most in at least seven years in July.

The British currency weakened to 79 pence as of 6:50 a.m. in London, from 78.87 pence at the end of last week. It was at $1.9874, from $1.9916. The pound dropped 6.9 percent versus the euro this year and is little changed against the dollar.

The average cost of a residential property in England and Wales slipped 4.4 percent from a year earlier, Hometrack Ltd., a London-based research company, said today in a statement. That's the biggest annual drop since the index started seven years ago. Prices fell 1.2 percent from June.

Slowing economic growth and the prospect of cuts in the Bank of England's benchmark interest rate will weaken the pound to $1.90 and 79 pence per euro by year-end, according to the median forecast of analysts and strategists surveyed by Bloomberg. The central bank left its key rate at 5 percent on July 10.

The odds of policy makers cutting interest rates for a third time this year were little changed last week, with the implied yield on the December short-sterling futures contract staying at 5.94 percent.

U.K. government bonds climbed last week, with the yield on the 10-year gilt falling 5 basis points to 4.99 percent. The price of the 5 percent security due March 2018 advanced 0.35, or 3.5 pounds per 1,000-pound ($1,987) face amount, to 100.07. The two-year note slid 13 basis points to 4.97 percent.

Gains in gilts will lower the yield on the 10-year note to 4.89 percent by year-end, according to a Bloomberg survey. Bond yields move inversely to prices.

To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net