Pound Trades Near 5-Year Low Against Dollar as Sales Decline

By Kim-Mai Cutler

Oct. 23 (Bloomberg) -- The pound traded near its lowest level in more than five years against the dollar as reports showed declining retail sales and home-loan approvals, adding to evidence the U.K. is on the brink of a recession.

The pound slid after the Office for National Statistics said retail sales fell 0.4 percent in September from August and the British Bankers' Association reported a 57 percent slump in mortgage approvals last month compared with a year earlier.

``The line of least resistance is a weaker pound in a generally dollar-bullish environment,'' said Russell Jones, head of fixed-income and currency research in London at RBC Capital Markets. ``The pound came a long way. That's quite a rare occurrence.''

The British currency traded at $1.6227 as of 11:01 a.m. in London, from $1.6267 yesterday, when it had the steepest intraday decline against the dollar in 16 years. Against the euro, the pound was at 79.04 pence, from 79.06 yesterday.

The currency has declined 5.4 percent against the dollar this week on growing evidence the U.K., Europe's second-largest economy, is headed toward a slump. A report tomorrow may show the economy contracted 0.2 percent in the third quarter from the previous three-month period. Bank of England Governor Mervyn King said this week the U.K. may enter a recession.

``I don't see anything that can stop this,'' said David Woo, global head of currency strategy in London at Barclays Capital. ``It's shocking. I can't say we've anticipated this move.''

Gilts Fall

Two-year gilts fell, snapping a six-day gain. The yield rose 6 basis points to 3.22 percent. The 4.75 percent note maturing June 2010 slipped 0.10, or 1 pound per 1,000-pound ($1,629) face amount, to 102.40. The yield on the 10-year security fell 1 basis point to 4.47 percent. Bond yields move inversely to prices.

The spread, or difference, in yield between two- and 10- year notes was at 123 basis points, near the widest since October 1996, in a sign traders expect the Bank of England to lower interest rates again by year-end to buoy the economy.

Ten-year yields may fall to 4.37 percent by the end of the quarter, according to the median forecast of eight economists surveyed by Bloomberg.

Gilts have returned 0.5 percent this quarter, compared with a 1.8 percent return from German bunds and a 1.1 percent return from U.S. Treasuries, according to the U.S. Treasury Master, German Federal Governments and U.K. Gilts indexes compiled by Merrill Lynch & Co.

Inflation is likely to fall ``sharply'' in 2009, Bank of England policy maker Kate Barker said in an interview published with thebusinessdesk.com today, prompting traders to raise best on more cuts in borrowing costs. The implied yield on the December sterling interest-rate futures contract fell 5 basis points to 4.66 percent.

The U.K. Treasury sold 3 billion pounds of 10-year notes today yielding 4.47 percent today to help finance the government's rescue of the three of the country's biggest banks. Investors bid for more than twice as many notes were on offer.

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