Pound Drops, Gilts Advance as U.K. Consumer Confidence Tumbles

By Andrew MacAskill and Kim-Mai Cutler

Aug. 6 (Bloomberg) -- The pound fell against the euro and dollar after an industry survey showed U.K. consumer confidence dropped in July by the most in at least four years amid slumping house prices and accelerating inflation. Government bonds rose.

The currency slid for the fourth day in five versus the euro. An index of sentiment sank 11 points to 51, the biggest decline since the survey began in May 2004, mortgage-lender Nationwide Building Society said today. The Bank of England will keep its benchmark interest rate at 5 percent tomorrow, according to all 60 economists surveyed by Bloomberg News.

``You have the most exposed and overstretched consumer in the world,'' said John Hardy, the head of foreign-exchange strategy in London at Saxo Bank A/S, a Copenhagen-based bank specializing in currencies, stocks, bonds and derivatives. ``This is setting the U.K. up for a very hard landing.'' The pound is set for ``a big fall through to around $1.93,'' he said.

The British currency weakened to 79.24 pence as of 9:52 a.m. in London, from 79.06 pence yesterday. It traded at $1.9534, from $1.9547. The pound fell yesterday to $1.9521, the lowest level since June 18.

A separate report showed that the economy grew at the slowest pace in three years in the quarter through July, the National Institute of Economic & Social Research said. Policy makers have cut interest rate three times since November as growth sputtered.

The yield on the two-year government note dropped 5 basis points to 4.70 percent. The price of the 4.75 percent security due June 2010 rose 0.08, or 80 pence per 1,000-pound ($1,953) face amount, to 100.08. The 10-year yield fell 3 basis points to 4.73 percent. Yields move inversely to bond prices.

The pound has slipped 1.6 percent versus the dollar this year and 7.3 percent against the euro.

Britain's faltering economy will weaken the currency to $1.90 and to 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.

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