Pound Slides Against Dollar, Euro as Recession Concern Deepens

By Agnes Lovasz

Oct. 27 (Bloomberg) -- The pound slid against the dollar and euro after an industry report said U.K. house prices dropped by the most in at least seven years this month and will keep falling as the economy deteriorates.

Declines by the British currency may be exacerbated after the Sunday Times reported yesterday that Chancellor of the Exchequer Alistair Darling will say this week the economic crisis will be deeper and longer-lasting than first predicted. The pound had its biggest weekly loss last week since Black Wednesday in 1992 as the economy shrank more than forecast in the third quarter.

The pound fell 2.4 percent to $1.5515 as of 7:27 a.m. in London, its seventh consecutive drop, from $1.5897 at the end of last week, when its 5.9 percent intraday plunge was the most in at least 37 years. Against the euro, the currency slipped to 80.37 pence, from 79.31.

The average cost of a residential property in England and Wales slipped 7.3 percent from a year earlier to 163,200 pounds ($254,000), London-based Hometrack Ltd. said in a statement today. That's the biggest annual drop since the index started in 2001. Prices fell 1.3 percent from September.

``The expectation of a forthcoming recession and rising unemployment will further undermine demand for housing,'' Richard Donnell, director of research at Hometrack, said in a statement. ``Continued price falls are inevitable.''

Looming Recession

The government hasn't lost control of the public finances, although the crisis has hurt its revenues, Darling will say in a speech at the annual Mais lecture in London on Oct. 29, the Sunday Times reported, without saying how it got the information.

Prime Minister Gordon Brown and Bank of England Governor Mervyn King said for the first time last week that Britain is heading for a recession, while Charlie Bean, the central bank's governor for financial stability, said in an Oct. 24 interview with the Scarborough Evening News that the turmoil in the banking industry is the worst ever.

A collapse in credit markets and the worst housing slump in a generation have buffeted the British economy, Europe's second- biggest. The U.K. is already in a recession and the economy will contract for the next three quarters, Ernst & Young's ITEM Club, which uses the same forecasting model as the Treasury, said in a report on Oct. 20.

The economy shrank 0.5 percent in the third quarter, the Office for National Statistics in London said last week. The median forecast of 35 economists in a Bloomberg survey was for a contraction of 0.2 percent.

Government bonds rose last week, with the yield on the two- year gilt plunging 54 basis points to 3.09 percent, the steepest drop since February 1993. The 4.75 percent note maturing June 2010 climbed 0.84, or 8.4 pounds per 1,000-pound ($1,583) face amount, to 102.59. The yield on the 10-year security dropped 31 basis points to 4.36 percent, its biggest weekly decline since 1999. Bond yields move inversely to prices.

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