U.K. Pound Falls to 22-Month Low

The U.K. pound fell to a 22-month low against the dollar and government bonds advanced after the Bank of England cut its growth forecast and held out the prospect of lower interest rates as unemployment rose the most in almost 16 years.

The pound weakened for a ninth day versus the U.S. currency as Bank of England Governor Mervyn King said he saw a ``chill in the economic air.'' The economy will grow about 0.1 percent on a year-on-year basis in the first quarter of 2009, compared with a previous prediction of 1 percent, according to bank forecasts published today. U.K. unemployment rose in July by the most since December 1992 and wage growth slowed, reports showed.

The British currency fell to $1.8777 by 1:46 p.m. in London, from $1.8968 yesterday. It fell as low as $1.8736, or the lowest since October 2006. The pound also declined to 79.45 pence per euro, from 78.69 pence.

The pound hasn't dropped for nine consecutive days against the dollar since July 2005, when slowing economic growth and falling house prices presaged a cut in U.K. interest rates the following month. The currency's 7.6 percent decline since July 31 is its largest since February 1993. In the past five days, it's fallen more than any other currency versus the dollar except the South African rand and Australian dollar.

The weakening currency underlines concern that a slumping housing market is pushing Europe's second-biggest economy toward a recession. The pound was as high as $2.0157 three weeks ago.

Inflation may accelerate above 5 percent before slowing to just below the central bank's 2 percent ceiling in two years if interest rates stay on hold, as investors predict, according to the central bank.

Traders raised bets the bank will cut interest rates this year, with the implied yield on the December sterling interest- rate futures contract tumbling 23 basis points to 5.51 percent. The bank's benchmark interest rate is 5 percent.

U.K. claims for jobless benefits climbed 20,100 from June to 864,700, the biggest increase since December 1992, the Office for National Statistics said today in London. Incomes rose the least in five years.

The pound fell 7.5 percent against the euro this year. It's down 5.4 percent versus the dollar, after being little changed against the U.S. currency as recently as July 31.

U.K. Pound Falls to 22-Month Low

TradingEconomics.com, Bloomberg
8/13/2008 6:32:15 AM