Pound Declines 11th Day Versus Dollar, Sliding for Fourth Week

By Andrew MacAskill and Kim-Mai Cutler

Aug. 15 (Bloomberg) -- The pound slid for an 11th day against the dollar, 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 was headed for its biggest weekly drop since March 1995 after Bank of England Governor Mervyn King said two days ago 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 receipts fall. The pound tumbled 6.5 percent since July 31.

``These are ferocious moves,'' said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp. ``There has been a fundamental shift in thinking.''

The pound dropped 0.8 percent to $1.8554 as of 9:14 a.m. in London, from $1.8698 yesterday. The 11-day run was the longest since at least January 1971. The currency, poised for a 3.4 percent decline in the week, tumbled to a more than two-year low. The pound was at 79.37 pence per euro, from 79.28 pence.

Britain's currency may recover to $1.90, though longer term it should still be sold against the dollar, Derrick said.

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

Interest Rates

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.

Still, traders are paring 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 5.2 percent today from 5.44 percent at the end of July.

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, the Financial Times reported. Visits by overseas residents dropped 5 percent from the previous quarter, seasonally adjusted, and in the year to the end of June visitor numbers declined 3 percent, the FT said, citing Britain's Office for National Statistics.

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 U.K. 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.

``Aggressive Move''

``Already this summer 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 yesterday.

Technical indicators suggested the pound may be due for a recovery. The 14-day relative strength index was at 14.9 today, lower than ``Black Wednesday'' in 1992, when the pound was forced out of the Exchange Rate Mechanism, which tied its value to other European currencies. A reading below 30 can signal a change in price direction.

In 1971, Britain under Prime Minister Edward Heath was two years from joining the European Economic Community, a precursor of the European Union, and U.S. President Richard Nixon ended the so-called gold standard.

Bonds Rise

Government bonds rose, with the yield on the 10-year gilt falling 3 basis points to 4.61 percent. The price of the 5 percent security due March 2018 rose 0.23, or 2.3 pounds per 1,000-pound ($1,853) face amount, to 103.02. 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. Bond yields move inversely to prices.

The pound is already below the level at which it's forecast to end 2008. 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 6.7 percent versus the dollar this year, after being little changed against the U.S. currency as recently as July 31. It's down 7.5 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;