U.K. Pound Declines by Most in Week Against Euro Since 2005

By Agnes Lovasz


Nov. 17 (Bloomberg) -- The U.K. pound posted its biggest weekly drop against the euro in more than two years as signs economic expansion is slowing stoked speculation the Bank of England will lower its interest rate as early as December.

The pound slipped against 14 of the 16 most-active currencies in this past week. It fell to the lowest versus the euro in 4 1/2 years after retail sales unexpectedly dropped, underpinning the case for lower borrowing costs. The central bank this past week forecast economic growth will slow ``sharply'' in 2008 and signaled at least one reduction in the benchmark rate.

``Sterling is likely to remain under pressure against the euro this year,'' said Martin McMahon, a currency strategist at Credit Suisse Group in Zurich. ``The inflation report was on the dovish side, retail sales weren't great, so it's understandable we see markets pricing in rate cuts, even before Christmas.''

Against the euro, the U.K. currency fell to 71.52 pence by late yesterday in London, from 70.22 on Nov. 9. It declined to 71.67 yesterday, the weakest since June 2003. The weekly decline of 1.9 percent was the biggest since July 2005.

The pound also fell this past week by the most against the dollar in almost 1 1/2 years, trading at $2.0474, from $2.0903 a week ago.

The latest industry and government reports showed signs the housing-market boom has fizzled and consumers are reining in spending as interest rates at a six-year high curb demand.

Average U.K. house prices will be unchanged in 2008, compared with the most recent annual gain of 9.7 percent, Nationwide Building Society said yesterday.

Retail Sales

Government figures showed retail sales fell for the first time in nine months in October, dropping 0.1 percent, as shoppers bought less food and clothing.

The spread, or difference in yields, between two-year and 10-year gilts widened 10 basis points this past week to 11 basis points as short-dated paper outperformed longer maturities on risk aversion and speculation on lower interest rates.

Two-year yields fell 22 basis points in the week to 4.51 percent and 10-year yields dropped 11 basis points to 4.63 percent.

Assuming a reduction in borrowing costs next year, inflation will slow to its 2 percent target by 2009, according to the Bank of England's quarterly inflation report published Nov. 14.

Consumer prices increased 2.1 percent last month. Turmoil in financial markets ``poses the biggest downside risk'' to Europe's second-largest economy, the bank said.