Pound Posts Biggest Weekly Decline Versus Euro Since 2004

By Agnes Lovasz

Nov. 8 (Bloomberg) -- The pound posted its biggest weekly decline against the euro since December 2004 after the bigger- than-forecast interest-rate cut by the Bank of England stoked concern Britain's economic slump is deepening.

The U.K. currency also logged a weekly drop versus the dollar after policy makers, led by Governor Mervyn King, reduced the benchmark rate to 3 percent, the lowest level since 1955. Two-year gilts rose for a third week, pushing yields down more than 1 percentage point in that period. Traders raised bets more cuts will follow, interest-rate futures show.

``Continuing weak fundamentals will not yet allow the pound to recover,'' said Antje Praefcke, a currency strategist in Frankfurt at Commerzbank AG, Germany's second-biggest lender. ``The Monetary Policy Committee will go for further interest- rate cuts.''

The pound traded at 81.02 pence per euro in London late yesterday, from 81.38 pence on Nov. 6, and was down 2.3 percent in the week. It climbed to $1.5763 from $1.5627, trimming a weekly loss to 1.9 percent.

Monetary policy is being eased as the 15-month credit crisis inflicts harsher blows to growth and inflation than central bankers anticipated. The International Monetary Fund cut Nov. 6 its month-old forecast for global expansion in 2009 to 2.2 percent from 3 percent. The U.K. economy will contract 1 percent, the European Commission predicted Nov. 3.

Reports this week showed U.K. services, accounting for three-quarters of the economy, shrank in October and factory production had its longest streak of declines for almost three decades. Production slid 0.8 percent from August, the biggest drop in 19 months.

Bonds Climb

The European Central Bank lowered Nov. 6 its main rate by half a percentage point to 3.25 percent, its second cut in less than a month. ECB President Jean-Claude Trichet declined to rule out further reductions.

U.K. government notes rose, with the yield on the two-year gilt falling 5 basis points to 2.48 percent, from 2.93 percent at the end of last week. The 4.75 percent security due June 2010 rose 0.05, or 50 pence per 1,000 face amount, to 103.47. The 10- year yield dropped to 4.19 percent from 4.52 percent on Oct. 31.

The implied yield on the December short-sterling futures contract fell 12 basis points to 3.56 percent, after dropping 43 basis points Nov. 6, indicating traders increased bets for more rate reductions.

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