Pound Sinks to Record Versus Euro as HBOS Says Economy Worsens

By Matthew Brown

Dec. 12 (Bloomberg) -- The pound weakened to a record low against the euro for a fifth day after HBOS Plc said bad loans will keep rising as credit conditions deteriorate, signaling the U.K. economic slump is intensifying.

The currency also declined versus the dollar after the U.S. Senate’s rejection of a $14 billion rescue plan for automakers sent stocks tumbling as demand for riskier assets evaporated. The FTSE 100 Index lost 3.1 percent and the MSCI World Index dropped 2 percent. The implied yield on the March short-sterling futures contract fell as traders increased bets the Bank of England will keep cutting interest rates.

“The evidence for further rate cuts is generally seen as incontrovertible and this news from HBOS is the exclamation mark,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp. “Stocks are down overnight due to the bailout failure.”

The pound depreciated as much as 0.7 percent to 89.42 pence, the lowest level since the euro’s debut in 1999, and was at 89.19 pence as of 11:31 a.m. in London, from 88.82 pence yesterday. The currency was set for its second straight weekly decline. Against the dollar, it fell 0.9 percent to $1.4900, paring its gain in the five days to 1.5 percent.

The Bank of England cut its interest rate to 2 percent on Dec. 4, from 5.5 percent at the start of the year, as policy makers tried to limit the fallout from the global financial crisis. The European Central Bank pared its benchmark to 2.50 percent the same day. ECB Governing Council member Axel Weber said caution is needed in deciding whether to cut rates further.

Bad Loans

HBOS, which agreed to a takeover by Lloyds TSB Group Plc, said this year’s charge for bad loans rose to 5 billion pounds ($7.5 billion), led by an increase in corporate delinquencies that was worse than analysts predicted.

The Senate scotched the bailout plan aimed at preventing the collapse of General Motors Corp. and Chrysler LLC in a procedural vote after talks failed in a dispute with Republicans over how quickly union wages should be cut. The yield on March short- sterling futures contracts declined to 2.13 percent today from 2.18 percent yesterday.

“We are going to continue to see new highs in euro- sterling,” Mellor said. “There’s a bigger downside, even now, to U.K. interest rates than there is to euro-zone rates. Despite the fact that we seem to be at dizzying heights there’s no likelihood that we’re going to see any significant pullback any time soon, apart from the inevitable profit taking.”

Government bonds jumped, pushing the yield on the 10-year gilt down 10 basis points to 3.50 percent. The 5 percent security due March 2018 gained 0.84, or 8.4 pounds per 1,000-pound face amount, to 111.74. The yield on the two-year gilt tumbled 16 basis points to 1.64 percent. Yields move inversely to bond prices.

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