Pound Falls to Record Versus Euro a Fourth Day as Index Tumbles

By Matthew Brown

Dec. 11 (Bloomberg) -- The British pound declined to a record low against the euro for the fourth day after a U.K. index of manufacturers’ output expectations matched the lowest in 30 years, strengthening the case for interest-rate cuts.

The currency also fell versus the South Korean won and the New Zealand dollar after the Confederation of British Industry’s gauge of expectations for the next three months held at minus 42, the same as November and the lowest since September 1980. The pound weakened 17 percent against the euro this year as the economy slipped into its first recession in 17 years.

“The U.K. output data is a confirmation that the base rate is on a downward trajectory,” said Neil Jones, head of European hedge fund sales at Mizuho Capital Markets in London. “As long as the U.K. continues to move towards a zero interest-rate policy then the pound will underperform.”

The pound weakened to 88.16 pence as of 11:26 a.m. in London, from 88.08 pence yesterday. Against the dollar, the British currency climbed to $1.4946, from $1.4785.

The Bank of England reduced its benchmark interest rate to 2 percent from 5.5 percent this year as it sought to fend off the fallout from the global financial turmoil. The European Central Bank cut its main rate to 2.5 percent on Dec. 4.

British consumers’ predictions for inflation in the next year dropped the most since at least 1999 in November as the economic slump deepened, a survey for the Bank of England showed today, giving policy makers more reason to lower borrowing costs.

The pound may weaken to 91.5 pence per euro this year, the equivalent of an all-time low for the pound versus the German mark, Jones said.

U.K. two-year government bonds advanced, pushing the yield on the gilt down four basis points to 1.79 percent as of 12:17 p.m. in London. The 4.75 percent security due June 2010 gained 0.06, or 60 pence per 1000-pound ($1,492) face amount, to 104.32. The yield on the 10-year security was at 3.59 percent. Yields move inversely to bond prices.

The U.K Debt Management Office told sold 3.5 billion pounds of 4.5 percent gilts due 2013. Demand was 1.96 times the securities, compared with 2.10 times at an auction on Oct. 16.

To contact the reporter on this story: Matthew Brown in London on mbrown42@bloomberg.net