Pound Slides Against Dollar, Euro as Recession Concern Deepens

By Agnes Lovasz

Oct. 27 (Bloomberg) -- The pound traded near the weakest in five years against the dollar and close to an all-time low versus the euro after a report on house prices added to evidence Britain's economy is sliding into a recession.

The currency declined for a seventh day against the dollar after Hometrack Ltd. said house prices dropped this month by the most since at least 2001 and U.K. stocks declined for a second day. The Sunday Times said yesterday Chancellor of the Exchequer Alistair Darling will say in a speech this week the economic crisis will be deeper and longer-lasting than first predicted.

``Whenever recession fears become the main issue, the pound depreciates,'' said Lutz Karpowitz, a currency strategist in Frankfurt at Commerzbank AG, Germany's second-biggest lender. ``The pound is in a very uncomfortable position.''

The pound fell against all 16 of its most-traded counterparts, dropping l.3 percent to $1.5420 as of 11:43 a.m. in London, from $1.5897 last week, when it had its biggest intraday decline in at least 37 years. Against the euro, the currency slipped to 80.73 pence, from 79.31. It traded at a record low of 81.96 pence per euro on Oct. 24.

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 said today. That's the biggest annual drop since the index started in 2001. Prices fell 1.3 percent from September.

`Undermine Demand'

``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.''

The government hasn't lost control of the public finances, although the crisis has hurt its revenue, 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 headed 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.

`Short at $1.60'

``The market continues to sell the pound across the board,'' Hans-Guenter Redeker, London-based global head of currency strategy at BNP Paribas SA, wrote in a note to clients. ``We suggest using rallies in the pound against the dollar to the $1.60 handle as an opportunity to form short positions.'' A short position is a bet that an asset's price will fall.

A collapse in credit markets and the worst housing slump in a generation have rocked 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 currency may fall below $1.50 in coming weeks and will move in a range of 79 pence to 81.50 pence per euro during the same period, Karpowitz forecast.

The pound had its biggest weekly loss last week since Black Wednesday in 1992 after a report on Oct. 24 showed the economy shrank 0.5 in the third quarter, more than the 0.2 percent forecast.

U.K. government notes were little changed, with the yield on the 10-year gilt at 4.36 percent. The 5 percent security due March 2018 fell 0.05, or 50 pence per 1,000-pound ($1,543) face amount, to 104.84. The yield on the two-year note held at 3.09 percent. Bond yields move inversely to prices.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net