Pound Falls Against Dollar as Economy Slumps, Home Sales Tumble

By Matthew Brown

Jan. 13 (Bloomberg) -- The pound fell against the dollar as reports showed the U.K. economy slumped the most in two decades and home sales dropped to the lowest level since at least 1978.

The U.K. currency also declined versus the Japanese yen and the Swiss franc as stock markets around the world slid amid growing concern about global growth. A British Chambers of Commerce’s survey of almost 6,000 companies showed the economy is at its most fragile since it began issuing the report in 1989.

“Sterling’s weak because of the housing survey and the retail numbers, but the more relevant aspects are dollar strength allied to risk aversion returning,” said Daragh Maher, deputy head of global foreign-exchange strategy in London at Calyon, the investment banking unit of Credit Agricole SA.

The pound fell for a third day against the dollar, declining 1 percent to $1.4676 as of 9:50 a.m. in London from $1.4822 yesterday. It was at 90.55 pence per euro from 90.20 pence, and 130.56 yen from 132.24.

The average number of home sales per surveyor slipped to 10.1, the lowest in at least three decades, from 10.6 in the quarter through November, according to the Royal Institution of Chartered Surveyors. Retail sales had the worst December in 14 years, a British Retail Consortium report showed.

The British economy contracted 1.5 percent in the fourth quarter, the most since 1980, the National Institute for Economic and Social Research said Jan. 10. The statistics office reported a 0.6 percent contraction in the third quarter.

The Bank of England reduced its benchmark interest rate to 1.5 percent last week, the lowest level in the bank’s history, to help counter the recession, the U.K’s first in 17 years. Prime Minister Gordon Brown yesterday promised 500 million pounds ($745 million) to encourage hiring and bank lending.

“If we keep on getting these very weak numbers then you have to assume the Bank of England has to cut interest rate further, even if the impact is less it these kind of levels,” Maher said.

U.K. government bonds rose, pushing the yield on the two- year gilt three basis points lower to 1.52 percent. The 4.25 percent security due March 2011 advanced 0.07 or 70 pence per 1,000 pound face amount to 105.74.

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