Pound Plumbs New Low Against Euro

Sterling plumbed a fresh record low against the euro in choppy trade on Wednesday, as the outlook for a sharply deteriorating UK economy sent investors fleeing from the currency.

The pound extended two sessions of losses against the euro to slide 0.2 per cent to £0.8779, its lowest level since the single currency was created in 1999.

Against a basket of currencies, the pound also hit a historic low, with the Bank of England’s effective sterling trade-weighted exchange rate index sinking to 79.7, its lowest level since records began in 1981.

Sterling’s steep decline – it has shed almost 20 per cent of its value against the euro since the start of this year – reinforced speculation that the Bank of England would be forced to implement further drastic rate cuts in the new year.

But a leading economic research institute warned that rate cuts would have a limited impact against the accelerating downturn in the UK.

The pound later came off its lows, however, boosted by reports that a bail-out for the big three” US carmakers was close to being approved. Against the euro, the pound clawed back gains, rising 0.2 per cent to £0.8752, while adding 0.2 per cent against the dollar at $1.4775.

High-yielding, riskier currencies registered cautious gains against the Japanese yen, with the Australian dollar adding 0.5 per cent to Y76.85, while the euro climbed 0.7 per cent to Y120.02. The Canadian dollar pared the previous session’s losses to rise 1.3 per cent to Y73.86.

The yen also fell back against the US dollar, down 0.6 per cent at Y92.75, and slipped 0.8 per cent against the euro at Y120.10.

The New Zealand dollar outperformed, after hawkish remarks from Alan Bollard, central bank governor, appeared to preclude any dramatic interest rate cut despite the country being in recession.

The kiwi strengthened 1.3 per cent against the yen to Y50.48, and 0.7 per cent against the US dollar, at $0.5437.

Meanwhile, the South Korean won surged 2.5 per cent against the dollar to 1393.70 won, propelled by a four-day stock market rally in Seoul which saw the benchmark Kospi index hit a four-week high.

TradingEconomics.com, Financial Times
12/10/2008 6:40:46 AM