By Andrew MacAskill and Lukanyo Mnyanda
Nov. 13 (Bloomberg) -- The pound dropped to a record low against the euro and breached $1.50 for a second day on mounting evidence Europe's second-biggest economy is snarled in a recession.
The U.K. currency fell through $1.50 yesterday for the first time in more than six years. BT Group Plc, the U.K.'s largest phone company, said today it aims to cut about 6 percent of its workforce in the year through March. The Bank of England yesterday indicated it will keep cutting interest rates as the economy slumps.
``Sterling weakness may persist for another two or three quarters,'' said Geoffrey Yu, a currency strategist in London at UBS AG, the world's second-biggest foreign-exchange trader. ``The pound will continue to drift lower as more cuts are needed. The BOE has fully endorsed this now.''
The pound dropped to $1.4842 as of 1:10 p.m. in London, from $1.4964 yesterday. Against the euro, it weakened to 84.32 pence from 83.56 pence. It weakened earlier to 84.57 pence, the weakest since the single currency's introduction in 1999,
Europe's largest economies are contracting amid a freeze on lending. Germany today confirmed it entered its worst recession in at least 12 years. A government report yesterday showed U.K. jobless claims rose to the highest level since March 2001.
The British currency's trade-weighted index dropped 2.9 percent to 78.35, the weakest since at least January 2000, according to indexes compiled by Deutsche Bank AG, the world's biggest currency trader.
`Remain a Burden'
``The present pound weakness reflects the current situation of the British economy quite well,'' analysts from Commerzbank AG, including Lutz Karpowitz, wrote in a client note today. ``We assume that the poor economic trend will remain a burden on the pound for the time being.'' The currency may decline to 85 pence per euro, according to Germany's second-biggest lender.
The pound fell 25 percent against the dollar and 15 percent versus the euro this year. It traded above $2 as recently as July 23.
Bank of England policy maker Andrew Sentance said today the pound's slide against the dollar and the euro will make it easier for manufacturers to cope with a recession. The currency's drop will also ``help redress some of the imbalances that have grown up over the years,'' he said.
The central bank is ``looking to see how low the pound can go before it needs intervention,'' Yu said. ``I don't think the Bank of England is trying to deliberately debase the pound, but they are not doing a very good job of propping it up.'' He declined say how far the pound may fall against the dollar.
Investors `Cautious'
U.K. Chancellor of the Exchequer Alistair Darling will forecast in his pre-Budget report this month the recession won't be over until 2010, the Independent cited him as saying in an interview.
``The U.K. is looking at the steepest recession of the G-7 countries and the sharpest cut in interest rates,'' said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp. ``All these factors serve to undermine sterling. Investors are cautious about putting their money here when they can get a higher return elsewhere.''
The pound's 14-day relative-strength index versus the euro, a technical indicator some traders use to forecast changes in price direction, was at 25.1 today, below the 30 threshold that signals a rebound.
The previous time the pound was below 30, on Sept. 3, the U.K. currency rose the next eight days.
Falling Rates
Gross domestic product will contract by an annual 1.8 percent in the first three months of the year, according to Bank of England forecasts published yesterday.
``We are certainly prepared to cut bank rate if that proves to be necessary,'' Governor Mervyn King said at a press conference later in London. Policy makers cut the benchmark rate last week by 1.5 percentage points to the lowest level since 1955.
Concern that the credit freeze is driving Britain into its worst slump since the 1990s prompted Prime Minister Gordon Brown to pledge an increase in spending Oct. 27, providing 50 billion pounds to shore up financial institutions.
The difference in yield, or spread, between two- and 10- year U.K. government bonds widened today to the most in 15 years as investors bought shorter-dated notes, betting the Bank of England will reduce borrowing costs.
Spread Widens
The spread widened to 182 basis points, the most since March 1993. The so-called steeper yield curve suggests investors have become more pessimistic about the outlook for economic growth.
``This is telling you about the depth of the economic slowdown in the U.K.,'' said Charles Diebel, head of European interest-rate strategy at Nomura International Plc in London. ``We are in uncharted territory and the Bank of England may have to respond with lower rates than we previously imagined.'' The yield curve may reach 250 basis points in the six months, he said.
The yield on the two-year gilt, more sensitive to interest rates, dropped 3 basis points to 2.27 percent. The 4.75 percent security due June 2010 rose 0.04, or 40 pence, per 1,000-pound ($1,486) to 103.79.
The yield on the 10-year gilt was little changed at 4.10 percent. Yields move inversely to bond prices.
The U.K. sold 4 billion pounds of 3.25 percent bonds maturing in 2011 today, drawing bids for 2.37 times the amount of securities offered.
To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
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