Pound Set for Record Weekly Drop Against Euro as Economy Slumps

By Andrew MacAskill

Nov. 14 (Bloomberg) -- The pound headed for a record weekly decline against the euro and slid versus the dollar in the period on mounting evidence the economy, Europe's second biggest, is gripped by a recession.

The pound reached an all-time low yesterday against the euro and traded below $1.50 today for a third day. The Bank of England indicated on Nov. 12 it will keep cutting interest rates as the economy slumps.

``The pound is very vulnerable now and may extend its already sharp declines,'' said Lee Hardman, a currency strategist in London at Bank of Tokyo-Mitsubishi Ltd. ``It is hard to see any signs of optimism for the pound at the moment.''

The pound advanced to 85.73 pence per euro as of 8:14 a.m. in London, from 86.06 pence yesterday, when it fell to a record 86.63 pence. The U.K. currency is down 5.2 percent versus the euro this week, the biggest drop since the common currency's debut in 1999.

Against the dollar, the pound fell to $1.4808, from $1.5643 a week ago, the steepest slide since the period ended Oct. 24.

Gross domestic product will contract by an annual 1.8 percent in the first three months of the year, according to forecasts from the central bank released on Nov. 12. ``We are certainly prepared to cut the bank rate if that proves to be necessary,'' Bank of England Governor Mervyn King said that day.

U.K. policy maker Andrew Sentance said yesterday the pound's slide against the dollar and the euro will make it easier for manufacturers to cope with a recession.

The pound may decline to $1.40 and 88 pence against the euro by year-end, Hardman said. That compares with $1.61 and 80 pence a euro, the median analyst estimates in a Bloomberg News survey.

The yield on the U.K. two-year note, more sensitive to interest rates, rose 2 basis points to 2.29 percent. The 4.75 percent security due June 2010 declined 0.05, or 50 pence, per 1,000-pound ($1,480) to 103.73.

The yield on the German two-year note rose above that of the comparable gilt for the first time since December 1993. The yield on the benchmark German note was at 2.30 percent today.

The yield on the U.K. 10-year gilt climbed 3 basis points to 4.12 percent. Yields move inversely to bond prices.

To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net