Pound Declines as U.K. House Sales Tumble to Lowest Since 1978

By Gavin Finch

Dec. 9 (Bloomberg) -- The pound dropped against the dollar and the euro after an industry report showed sales of U.K. homes slipped to the lowest level since at least 1978 as the economy plunged deeper into a recession.

The pound snapped a two-day gain against the U.S. currency as separate data showed retail sales fell in two consecutive months for the first time since at least 1995. The Bank of England last week cut its key interest rate to 2 percent, the lowest level in half a century. Traders are raising bets policy makers will lower it more than a quarter point in January.

“It’s going to be a pretty bleak” end of year, said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp. which holds $23 trillion as the world’s largest custodian of financial assets. “Sterling weakness will continue to kick in because rates here will be cut more dramatically.”

The U.K. currency weakened as much as 1.6 percent to $1.4679 and was at $1.4693 by 2:32 p.m. in London. It depreciated as much as 0.5 percent to 87.29 pence per euro, from 86.89 yesterday, when it traded at an all-time low of 87.39 pence. The pound will weaken to 90 pence in coming weeks, Derrick predicted.

Real-estate agents and surveyors sold an average of 10.6 homes a month each in the quarter through November, the least since the series began three decades ago, the Royal Institution of Chartered Surveyors said. Sales at retail stores open at least 12 months fell 2.6 percent in November from a year earlier, the British Retail Consortium said. That’s the first back-to-back annual decline since the survey began 13 years ago.

U.K. Manufacturing

The pound stayed lower after the Office for National Statistics said factory production dropped almost three times as much as economists forecast in October, extending its worst contraction since 1980. Manufacturing output fell 1.4 percent from September, the ONS said.

Britain’s currency lost more than a quarter of its value versus the dollar this year, the steepest annual drop since at least 1972, as the deteriorating economy persuaded policy makers to pare their benchmark rate to the lowest level since 1951.

A Credit Suisse Group AG derivatives index signaled traders are betting the central bank will cut the rate by at least a further 25 basis points on Jan. 8.

U.K. Versus McDonald’s

Government bonds rose, with the yield on the two-year gilt slipping nine basis points to 1.86 percent. The 4.75 percent security due June 2010 climbed 0.12, or 1.2 pounds per 1,000- pound ($1,470) face amount, to 104.24. The yield on the 10-year gilt fell four basis points to 3.54 percent. Yields move inversely to bond prices.

Investing in U.K. government debt is almost twice as risky as buying bonds sold by McDonald’s Corp., based on prices in the credit-default swap market. The cost of protecting against a default on gilts became more expensive on Sept. 29, when the pound suffered its biggest one-day loss against the dollar in 16 years after the government took control of British mortgage lender Bradford & Bingley Plc.

The U.K. sold 1.25 billion pounds today of inflation-linked government bonds maturing in 2032. The auction attracted 1.58 times more bids than the securities offered, compared with 2.49 times at a sale of the same notes in October.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net