Pound Slides as Bank Shares Drop, CBI Forecasts Contraction

By Gavin Finch

April 20 (Bloomberg) -- The pound slid the most in six weeks against the dollar as bank shares tumbled and the Confederation of British Industry forecast the U.K. economy will shrink more than initially expected this year.

The British currency also fell versus the euro, the yen and Swiss franc as the FTSE 350 Banks Index, a benchmark for the country’s lenders, dropped 3.5 percent. The economy will contract 3.9 percent in 2009, compared with an earlier prediction of 3.3 percent, the CBI said today. U.K. financial- services companies may cut about 29,000 jobs this year, according to the Centre for Economics & Business Research Ltd.

“There’s plenty of negativity about the U.K. economy for sterling to be dealing with,” said Jeremy Stretch, a senior currency strategist in London at Rabobank International, the Netherlands’ biggest mortgage lender. “If you’re an international investor, the U.K. probably doesn’t look like a safe bet at the minute.”

The British currency slipped to $1.4559 by 12.45 p.m. in London, from $1.4797 last week. It earlier declined to $1.4538, the biggest drop since March 9, and the lowest level since April 2. The pound weakened to 89.01 pence per euro, from 88.22 pence.

A slump in house prices and the first recession since the 1980s have driven the pound 26 percent lower versus the dollar in the past 12 months, battering the popularity of Prime Minister Gordon Brown’s Labour government before next year’s general election.

House prices declined 7.3 percent over the past year, according to Rightmove Plc, the operator of the biggest U.K. residential property Web site. They advanced in April compared with the previous month, with the average asking price climbing 1.8 percent to 222,077 pounds ($328,000), Rightmove said today.

Stock Losses

The FTSE 100 Index, a benchmark for U.K. stocks, fell 1.1 percent, while the MSCI World Index slipped 0.8 percent. Futures on the Standard & Poor’s 500 Index dropped 1.4 percent.

U.K. 10-year gilts advanced after the CBI, the country’s main business lobby, said Chancellor of the Exchequer Alistair Darling should limit spending on economic-stimulus packages, which are funded through selling government debt.

Darling, who presents his budget to lawmakers on April 22, should avoid “any further major fiscal boosts,” CBI Director General Richard Lambert said. The Bank of England will buy 3.5 billion pounds of gilts today as part of its quantitative-easing plans.

The gains pushed the yield on the 10-year bond down three basis points to 3.32 percent. The 4.25 percent security due March 2019 rose 0.28, or 2.8 pounds per 1,000 pound face amount, to 109.85.

The two-year yield was little changed at 1.41 percent. Bond yields move inversely to prices.

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