Pound to Plummet 13% to Lowest Level Since 1985, JPMorgan Says

By Candice Zachariahs

Nov. 17 (Bloomberg) -- The pound will drop 13 percent against the dollar and 8 percent versus the euro as U.K. banks shrink foreign borrowings and the country's policy makers favor a weaker currency, JPMorgan & Chase Co. said.

The pound will ``trough'' at $1.28, a level not seen since 1985, and sink to a record low of 92 pence per euro in early 2009 as Britain's banks shrink foreign currency borrowings and demand for safety strengthens the U.S. dollar, JPMorgan said. U.K. banks' total foreign-currency borrowings equaled 276 percent of gross domestic product as of June 30, JPMorgan said.

``The U.K. may not be Iceland but the temperature is certainly dropping,'' wrote London-based Paul Meggyesi, a currency strategist at JPMorgan, in a research note dated Nov. 14. ``We take an axe to our pound forecasts to reflect the risk of continued bank deleveraging.''

The pound fell for a sixth day to $1.4682 as of 10:04 a.m. in Tokyo from $1.4740 on Nov. 14. It traded at 85.31 pence per euro, after a record decline last week.

The median estimate of 30 analysts in a Bloomberg News survey is for the pound to trade at $1.56 and at 80 pence per euro in the first quarter. JPMorgan had previously said the pound would bottom at $1.48 and in ``the low 0.80s'' against the euro.

Foreign Borrowings

Britain's banks had gross foreign borrowings of $6 trillion at the end of the second quarter of 2008, Meggyesi wrote. Their net exposure was $381 billion, or 18 percent of GDP, with U.S. dollar and yen borrowings making up the largest share, he wrote.

The Bank of England is expected to cut interest rates after forecasting on Nov. 12 that the U.K. economy will contract by an annual 1.8 percent in the first three months of next year.

``We are certainly prepared to cut the bank rate if that proves to be necessary,'' Bank of England Governor Mervyn King said that day.

The BOE slashed rates by an unexpected 150 basis points to the lowest since 1955 on Nov. 6. The U.K. central bank will bring the main rate to 2 percent from the current 3 percent at the next scheduled decision on Dec. 4, BNP Paribas SA, Barclays Capital and JPMorgan said in e-mailed notes on Nov. 12.

``In welcoming the boost to growth and downplaying the inflationary consequences of a falling exchange rate, the Bank confirmed that the authorities regard currency weakness as a net economic benefit,'' Meggyesi wrote on Nov. 14.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net