Pound Declines 11th Day Against Dollar, Slides for Fourth Week

By Kim-Mai Cutler and Andrew MacAskill

Aug. 16 (Bloomberg) -- The pound slid for an 11th day against the dollar yesterday, the longest run of declines in at least 37 years, on speculation a recession will force the Bank of England to cut interest rates.

The U.K. currency posted its fourth weekly drop after Bank of England Governor Mervyn King said Aug. 13 there was a ``chill in the economic air'' and a report showed unemployment climbed in July by the most in almost 16 years. Growth is being hurt as tourism flags and tax revenue fall. The pound tumbled about 6 percent since July 31.

``These are ferocious moves,'' said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp. ``The consensus has shifted. The talk three or four weeks ago was whether the central bank would hike rates. Now we've cemented the idea that a rate cut may come sooner.''

The pound dropped 0.3 percent to $1.8650 in London, after falling as much as 1 percent, from $1.8698 on Aug. 14. The 11-day run was the longest since at least January 1971. The currency, poised late yesterday for a decline of about 3 percent in the week, tumbled to a more than two-year low. The pound also traded at 78.73 pence per euro, from 79.28 pence the day before.

Britain's currency may recover to $1.90, though investors should still sell it against the dollar over the longer-term, Derrick said.

The U.K. economy will expand about 0.1 percent on a year-on- year basis in the first quarter of 2009, according to central bank forecasts published Aug 13. Its previous prediction was 1 percent. Growth has sputtered as house prices plunged. The property market came to a ``virtual standstill'' in July, the Royal Institution of Chartered Surveyors said this week.

Inflation Concern

At the same time, inflation running at 4.4 percent, the highest in at least 11 years, has limited the central bank's ability to reduce interest rates to revive the economy.

Traders pared bets that the 5 percent benchmark interest rate will be left unchanged or raised. The implied yield on the March short-sterling futures contract dropped to 5.20 percent on Aug. 15 from 5.44 percent at the end of July.

The pound fell about 11 percent since reaching a 26-year-high of $2.1161 on Nov. 9 as the Federal Reserve slashed interest rates seven times to 2 percent from 5.25 percent since September. The BOE cut its main rate by 0.75 percentage point in the period.

``The market had thought the Fed had blundered while the Bank of England stood firm on inflation,'' said Derrick. ``Now it's thinking the Fed had it absolutely right and has positioned the U.S. economy to cope far better than the U.K. will be able to do. There has been a fundamental shift in thinking.''

Tourism Dropping

The number of foreign tourists visiting the U.K. in the second quarter fell as financial concerns affect the economic outlook in other European countries, according to Britain's Office for National Statistics. Visits by overseas residents dropped 5 percent from the previous three months, seasonally adjusted, and in the year through June visitor numbers declined 3 percent.

Merrill Lynch & Co. booked $29 billion of losses from U.S. subprime mortgages and collateralized debt obligations through its U.K. unit, making it unlikely it will pay British taxes for years to come. Most of the losses were recorded this year, including $5 billion from the sale of $30.6 billion in collateralized debt obligations, the New York-based firm said in an Aug. 5 filing with the U.S. Securities and Exchange Commission.

``We are seeing the start of what we believe is going to be an aggressive move lower in yields and also the pound as the bearish developments in asset markets and the economy continue to overwhelm,'' a team led by Tom Fitzpatrick, global head of currency strategy in New York at Citigroup Global Markets Inc., wrote in an investor report Aug. 14.

Rebound Due?

Technical indicators suggested the pound may be due for a recovery. The 14-day relative strength index fell to 16.2 yesterday, similar to ``Black Wednesday'' in 1992, when the pound was forced out of the Exchange Rate Mechanism that tied its value to other European currencies. A reading below 30 can signal a change in price direction.

The pound's losing streak is the longest since at least 1971, when Britain was two years away from joining the European Economic Community, a precursor of the European Union, and U.S. President Richard Nixon ended the so-called gold standard. The pound averaged about $2.44 that year.

This month's decline may deepen the unpopularity of Prime Minister Gordon Brown, whose Labour Party lags behind the opposition Conservatives in opinion polls. Labour has been criticized because of slower economic growth amid rising food and fuel prices.

``The Prime Minister's rating has just been in a downward direction and it is picking up pace,'' said Greig Baker, research director at the polling company ComRes.

Bonds Rise

Government bonds rose, with the yield on the 10-year gilt falling 6 basis points to 4.58 percent. The yield dropped 11 basis points in the week. The price of the 5 percent security due March 2018 rose 0.44, or 4.4 pounds per 1,000-pound ($1,865) face amount, to 103.23. The yield on the two-year gilt, which is more sensitive to the outlook for interest rates, dropped 3 basis points to 4.53 percent, down 14 basis points since Aug. 8. Bond yields move inversely to prices.

The pound is already weaker than the level at which it's forecast to end 2008 against the dollar. The currency will be worth $1.89 and 80 pence per euro by year-end, according to the median forecast of analysts and strategists surveyed by Bloomberg.

The yield on the 10-year note will end the year at 4.87 percent, according to a separate survey.

The pound fell 6.2 percent versus the dollar this year, after being little changed against the U.S. currency as recently as July 31. It's down 6.7 percent against the euro in 2008.

To contact the reporters on this story: Andrew MacAskill in London at amacaskill@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net;