U.K. Pound Drops as Confidence Stays at Lowest in Four Years

By Lukanyo Mnyanda and Andrew MacAskill

Sept. 3 (Bloomberg) -- The pound fell to the lowest level since April 2006 against the dollar after a private report showed confidence among consumers stayed at the weakest in at least four years, adding to the case for interest-rate cuts.

The U.K. currency also traded near a record low against the euro after Nationwide Building Society said its index of consumer sentiment in August stayed at the weakest since the survey began in May 2004. Britain's services industry shrank last month, separate data showed today, reinforcing evidence the economy is headed toward a recession.

``This will add to the growing pressure on sterling and we can see it falling further,'' said Christian Lawrence, a strategist in London at Royal Bank of Canada. The currency will drop to $1.73 by year-end, according to Lawrence. The median forecast of analysts and strategists surveyed by Bloomberg is for the currency to end the year at $1.87.

The pound fell as much as 1 percent to $1.7668, the lowest level in 2 1/2 years, and was at $1.7758 by 1:32 p.m. in London, from $1.7839 yesterday. The U.K. currency traded at 81.35 pence per euro, after falling yesterday to 81.64 pence, the lowest level since the single currency's debut in 1999.

Nationwide's consumer index, based on the responses of 1,000 people, stayed at 52, the country's second-largest mortgage lender said today. The Chartered Institute of Purchasing and Supply said in a separate report an index based on a survey of about 700 service companies rose to 49.2 points last month, from 47.4 in July. That was the fourth consecutive reading below the 50 level that indicates expansion.

Below $1.78

The pound yesterday traded below $1.78 for the first time since April 2006 even as Prime Minister Gordon Brown announced measures to reverse a plunge in property values. It also fell to a record low against the euro on bets the Bank of England will resist cutting interest rates at a policy meeting tomorrow, delaying an economic recovery.

Brown yesterday proposed spending 1 billion pounds ($1.79 billion) sooner than planned to help the housing market recover from its worst slump in at least 18 years. Britain's building industry contracted last month, a survey showed yesterday.

``Rate cuts are approaching,'' Marco Valli, an economist at Unicredit MIB in Milan, wrote in a client note. ``Worsening domestic demand prospects and increasing weakness in the major export markets mean a manufacturing recovery isn't in the cards for the foreseeable future.''

Gilts rose, with the yield on the 10-year note falling 2 basis points to 4.47 percent. The 5 percent security due March 2018 gained 0.21, or 2.1 pounds per 1,000-pound face amount, to 104.10. The yield on the two-year note, more sensitive to interest-rate changes, fell 5 basis points to 4.39 percent.

Darling Comment

The pound's depreciation accelerated and bonds rose after Chancellor of the Exchequer Alistair Darling told the Guardian newspaper Aug. 30 the U.K. faces its biggest economic slowdown in 60 years. He said later he was referring to the global economy.

``We face a unique set of circumstances that we have not seen in a generation,'' Darling said in an interview broadcast on U.K. television channels yesterday. ``I remain optimistic that we can get through it. We will get through it.''

BNP Paribas SA, the most accurate currency forecaster in a 2007 Bloomberg survey, yesterday changed its year-end forecast for the pound against the dollar to $1.71, from a previous prediction of $1.88.

Traders pared bets on higher borrowing costs in the U.K., with the implied yield on the March short-sterling futures contract falling 2 basis points to 5.05 percent today. It was 5.50 percent on Aug. 1.

U.K. bonds outperformed their German counterparts in the past month, with the difference in yield between 10-year gilts and similar-maturity bunds narrowing 15 basis points to 33 basis points today. The spread with Treasuries was 73 basis points today, from 85 basis points Aug. 4.

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net