Pound Slides to 17-Month Low Versus Dollar on Recession Concern

By Andrew MacAskill and Kim-Mai Cutler

Aug. 8 (Bloomberg) -- The pound dropped to a 17-month low against the dollar on concern the economy is edging toward a recession as U.K. banks repossessed the most homes in 12 years in the first half and house prices lost two years of gains.

The British currency slid for a sixth day, falling below $1.93 for the first time since March last year. The number of home foreclosures jumped 41 percent from the previous six months as the credit squeeze left more consumers unable to pay their record debts, data from the Council of Mortgage Lenders showed. The Bank of England left interest rates on hold yesterday at 5 percent.

``It looks like the U.K. economic picture is going to deteriorate further and we are going to see sterling come under increasing pressure,'' said Ian Stannard, a senior currency strategist at BNP Paribas SA in London, who predicts the pound will fall to $1.85 by the end of the year. ``The next housing data in particular looks like it is going to be disastrous.''

The British currency fell to $1.9216, the lowest level since March 14, 2007, and was at $1.9262 as of 12:35 p.m. in London, from $1.9439 yesterday. It lost 2.5 percent since Aug. 1 and was headed for its biggest weekly slump in three years. It traded at 78.46 pence per euro, from 78.83, down 0.4 percent in the week.

A record drop in U.K. house prices has erased two years of gains, the London-based Times newspaper said, citing statistics from mortgage lender Halifax, a unit of HBOS Plc.

Rate Unchanged

The nine-member Monetary Policy Committee, led by Governor Mervyn King, kept the main interest rate for a fourth month after inflation accelerated and the economy edged toward a recession.

U.K. services, manufacturing and construction shrank in July and house prices dropped the most in a quarter-century, while King predicts consumer-price growth will soon accelerate to more than double the 2 percent target.

``Sterling is falling,'' said Paul Robson, a London-based currency strategist at the Royal Bank of Scotland Group Plc. ``Incomes are stretched and access to borrowing is restricted. Consumption will remain under pressure, slowing the economy.''

Government bonds headed for a third weekly gain. The yield on the two-year gilt was little changed at 4.65 percent. The price of the 4.75 percent security due June 2010 was 100.21. The 10-year gilt yield fell 1 basis point to 4.67 percent. Yields move inversely to bond prices.

The pound has slipped 3 percent versus the dollar this year and 6.8 percent against the euro.

Britain's faltering economy will weaken the currency to $1.91 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: Kim-Mai Cutler in London at kcutler@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net