U.K. Pound Falls Below $1.80 for First Time Since April 2006

By Lukanyo Mnyanda and Andrew MacAskill

Sept. 1 (Bloomberg) -- The British pound fell below $1.80 for the first time since April 2006 after Chancellor of the Exchequer Alistair Darling said the U.K. faced the worst economic slump in 60 years.

The pound also dropped to a record low versus the euro as investors cut wagers on higher interest rates by the Bank of England. Darling told the Guardian newspaper in an interview on Aug. 30 the economic slowdown would be ``profound and long- lasting.'' U.K. bonds rose, pushing the yield on the two-year gilt to the lowest level since May, as an industry report showed house prices slid last month by the most since at least 2001.

``The U.K. data flow is poor and it's now just a question of which is the straw that breaks sterling's back,'' said Martin McMahon, a currency strategist in Zurich at Credit Suisse Group. ``We're in the process of moving to rate cuts and it's now just a question of when not if.''

The pound fell as much as 1.2 percent to $1.7995, the lowest level since April 2006, before trading at $1.8022 by 2:26 p.m. in London, from $1.8211 last week. Against the euro, the pound slumped to 81.39 pence, the weakest level since the single currency's debut in 1999, before trading at 81.09 pence.

The average cost of a home in England and Wales slipped an annual 5.3 percent, Hometrack Ltd., a London-based research company, said today, while the Bank of England said in a separate report mortgage approvals fell to the lowest level since 1999. The central bank has cut its benchmark lending rate three times since December, to 5 percent.

Bonds Advance

Gilts rose, with the yield on the 10-year bond dropping 2 basis points 4.46 percent. The 5 percent security due March 2018 climbed 0.15 or 1.5 pounds per 1,000-pound face amount, to 104.02. The yield on the two-year gilt, which is more sensitive to interest-rate changes, fell as much as 9 basis points to 4.42 percent, the lowest since May 13, and was at 4.44 percent. Bond yields move inversely to prices.

The U.K. economy, the second-biggest in Europe, faltered after banks choked off credit following the collapse of the U.S. subprime-mortgage market, while an inflation rate at more than twice its 2 percent target has prevented the Bank of England from lowering borrowing costs to boost expansion.

The government now has its ``work cut out'' to persuade voters it deserves another term in power, Darling told the Guardian. He said ministers had ``patently'' failed to explain problems to the public. The Chancellor's comments contrast with those of Prime Minister Gordon Brown, who said Britain is better placed to weather global economic storms now than in the late 1970s and in the early 1990s.

`Split At Top'

``At a time when the survey numbers are coming in at record lows, the last thing you want to hear is there is a split at the top between the prime minister and the guy running the economy,'' said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. ``It does not fill investors with a great deal of confidence, so I don't think it's surprising sterling has collapsed.'' The currency may trade at $1.75 in the next six weeks, London-based Derrick said.

The difference in yield, or spread, between U.K. government bonds and their German counterparts has narrowed as traders bet the end of a decade-long rally in the nation's housing market will persuade policy makers to cut interest rates. The 10-year gilt yielded 33 basis points more than the German bund, down from 69 basis points on Feb. 25, the widest this year.

Ten-year gilts yielded 3 basis points more than two-year notes today, the first time they have yielded more than the shorter dated notes since Aug. 20.

``The U.K. economy is looking very soft,'' said Mitul Kotecha, global head of currency strategy in Hong Kong at Calyon, the investment banking unit of France's Credit Agricole SA. ``Sterling looks most vulnerable and there's some more scope for weakness against the dollar.''

The implied yield on the March short-sterling futures contract dropped 13 basis points today to 5.06 percent, indicating investors are reducing bets on rate increases.

The nation's bonds have returned 4.8 percent in the past two months, compared with 3.4 percent for their European counterparts, according to Merrill Lynch & Co.'s EMU Direct Government and U.K. Gilts Master indexes.

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