U.K. Pound Falls as Housing Measures Deepen Recession Concern

By Lukanyo Mnyanda and Andrew MacAskill

Sept. 2 (Bloomberg) -- The U.K. pound dropped for a sixth day against the dollar and the euro as Prime Minister Gordon Brown announced measures to reverse a plunge in property values, adding to evidence the economy is headed toward a recession.

Brown 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 shrank last month, a survey showed today. The pound slipped below $1.80 yesterday for the first time since April 2006 after Chancellor of the Exchequer Alistair Darling told the Guardian newspaper the U.K. faces its biggest economic slowdown in 60 years.

``The data has really been weak and the market is increasing expectations of rate cuts,'' said Marcus Hettinger, a currency strategist in Zurich at Credit Suisse Group, Switzerland's second- largest bank. ``That's undermining the pound,'' which may fall to $1.76 in ``the next couple of days,'' he said.

The pound dropped to $1.7838 as of 1:28 p.m. in London, from $1.8014 yesterday. It's the first time it has traded below $1.79 in almost 2 1/2 years. The U.K. currency slipped to 81.64 pence per euro, its lowest level since the introduction of the single currency in 1999, and was last at 81.24, from 81.13.

An index based on a survey of purchasing managers at building companies was at 40.5, compared with 36.7 in July, the lowest since the survey began in April 1997, the Chartered Institute of Purchasing and Supply and Markit said today. A reading below 50 indicates contraction.

The government suspended a tax on U.K. homes bought for less than 175,000 pounds, the Treasury said in a statement today. The exemption from stamp duty will apply for a year, starting tomorrow, it said. The measure will cost the government 600 million pounds in lost revenue over the 12 months, a Treasury official said.

Rates Outlook

Traders are paring bets on higher borrowing costs in the U.K., with the implied yield on the March short-sterling futures contract falling 39 basis points in the past month to 5.11 percent today. The Bank of England will keep the nation's key interest rate at 5 percent at a meeting in two days' time, according to a Bloomberg News survey of economists.

The world's leading central banks should keep interest rates at their current levels as they try to balance strong inflation with weak expansion, the Organization for Economic Cooperation and Development said today.

`Spring a Surprise'

``The BOE is uniformly expected to keep rates steady this week, but there has to be some chance they spring a surprise cut on the market,'' Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney, wrote in a note today.

Ten-year gilts declined for the first time since Aug. 27, with the yield rising 8 basis points to 4.54 percent. The 5 percent security due March 2018 dropped 0.71, or 7.1 pounds per 1,000-pound face amount, to 103.45. The yield on the two-year note, which is more sensitive to interest-rate changes, climbed 7 basis points to 4.48 percent.

Yesterday, the yield on the 10-year note dropped to the lowest level since April as more investors bet the U.K. economy, the second-largest in Europe, is headed for its first recession since the early 1990s amid a worldwide credit crunch that's dried up mortgage financing and hurt consumer spending.

The notes dropped on concern Brown's package may boost government spending, requiring extra borrowing.

The Debt Management Office sold 2.25 billion pounds of gilts maturing in 2049 today. The 4.25 percent securities were sold at an average yield of 4.37 percent, according to the DMO, which manages debt sales for the Treasury. Demand exceeded supply by 1.73 times, the DMO said.

`A Lot of Supply'

``The housing package may add to the budget deficit, so that won't be good for gilts,'' said Jason Simpson, a fixed- income strategist in London at Royal Bank of Scotland Group Plc, the U.K.'s second-largest bank. ``There's a lot of supply coming through.'' The 10-year note may hold at current levels and yield 4.55 percent at year-end, Simpson said.

The pound slumped 3 percent versus the euro in the past month as the difference in yield, or spread, between 10-year gilts and German bunds of similar maturity contracted. The gilts yielded 33 basis points more than their German counterparts today, down from 69 basis points on Feb. 25, the widest this year. The spread was 49 basis points a month ago.

``The fear is the economic downturn has gained momentum,'' Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France's biggest bank, wrote in a research note yesterday. ``The burden of adjustment is currently falling on sterling.''

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