Pound Declines for Second Day on Concern Economy Deteriorating

By Anna Rascouet

April 27 (Bloomberg) -- The pound declined for a second day against the dollar after former U.K. Treasury adviser Roger Bootle said Britain may be heading for a 1930s-type depression as house prices slump.

The British currency also fell versus the Japanese yen as concern an outbreak of swine flu in Mexico will spread to Europe stoked demand for currencies perceived as a refuge from financial turmoil. U.K. house prices dropped for a 19th month in April, Hometrack Ltd. said in a separate report. BNP Paribas SA lowered its forecast for the pound, predicting it will trade at $1.49 by the end of June, from a prior estimate of $1.58.

“The U.K. economy is going to deteriorate far more rapidly than the market was expecting,” said Ian Stannard, a currency strategist in London at BNP Paribas SA. “Sterling is under pressure from the events of last week and negative news over the weekend.”

The pound weakened 0.7 percent to $1.4577 by noon in London and depreciated 1.3 percent to 140.77 yen. It was little changed at 90.13 pence per euro, and may trade at 95 pence to 96 pence per euro over the next few months, Stannard said.

The British currency slipped 1.5 percent against the euro in the past five days, paring its advance this year to 5.6 percent, amid signs the slump in Europe’s second-largest economy is deepening.

Gross domestic product will drop 1 percent in 2010 after shrinking 4 percent this year, Bootle said in a Bloomberg Television interview. The median estimate of 17 economists surveyed by Bloomberg is for 0.3 percent growth next year. Bootle was on former Chancellor of the Exchequer Kenneth Clarke’s panel of economic forecasters, known as the “Wise Men,” under the previous Conservative government until 1997.

Darling Forecasts

The current chancellor, Alistair Darling, said in his budget report to Parliament on April 22 the economy will contract 3.5 percent this year and expand 1.25 percent in 2010.

Prime Minister Gordon Brown’s government will sell a record 220 billion pounds ($321 billion) of gilts this fiscal year to help fund the budget deficit and revive the economy, the Debt Management Office said last week. That’s 50 percent more than last year.

The pound will trade at $1.51 by the end of September, compared with prior estimates of $1.65, analysts led by Hans- Guenter Redeker, the London-based global head of currency strategy, also said today. Sterling will trade at 95 pence per euro by the end of June and 96 pence by the end of the third quarter, they said. The previous estimates were 90 pence and 88 pence.

Credit Rating

“The massive fiscal deterioration will push the debt levels well above 70 percent of gross domestic product, which in combination with excessive private debt, might force rating agencies to take down the U.K.’s creditworthiness,” Redeker’s team wrote.

The cost of hedging against losses on British government debt through credit-default swaps rose to 101 basis points at 8:50 a.m. in London, according to CMA Datavision prices. It climbed every day last week, from 86 basis points on April 17.

Gilts advanced as investors sought the safety of government fixed income on concern the swine flu outbreak may spread and burden a global economy already mired in recession. The U.K.’s FTSE 100 Index of shares fell 1 percent.

“It’s the Mexican swine flu,” said Jason Simpson, an interest-rate strategist in London at Royal Bank of Scotland Group Plc. “All fixed-income markets rallied on the back of that.”

The yield on the two-year note fell four basis points to 1.7 percent, leaving it 27 basis points lower since the day before Darling presented the budget. The 4.25 percent security due March 2011 climbed 0.07, or 70 pence per 1,000-pound ($1,460) face amount, to 105.64. The 10-year gilt yield slipped three basis points to 3.45 percent. Bond yields move inversely to prices.

To contact the reporter on this story: Anna Rascouet in London arascouet@bloomberg.net.