By Kim-Mai Cutler Oct. 21 (Bloomberg) -- The British pound slipped below $1.70 against the dollar after U.K. manufacturing confidence fell to its weakest in almost three decades as the collapse in lending between banks drives the economy into a recession. The pound declined for a third day versus the dollar and pared an advance against the euro after the Confederation of British Industry said its quarterly gauge of business optimism plunged to the lowest level since July 1980. The Treasury sold 4.75 billion pounds ($8.2 billion) of notes maturing in 2011 today to help fund a 37-billion pound bailout of the nation's biggest banks. ``There are substantial negatives for the pound that are going to be manifested in dollar terms,'' said Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA. ``The U.K. has a fragile housing market, weak employment and slowing domestic demand.'' The pound may weaken to $1.55 by the beginning of 2010, Redeker said. The U.K. currency fell to as low as $1.6896 pence per dollar, the lowest in more than a week, and was at $1.6901 as of 4:50 p.m. in London, from $1.7152 pence yesterday. Against the euro, the pound was little changed at 77.72 pence, after trading at 77.38 earlier. A collapse in credit markets and the worst housing market in a generation are driving the U.K. economy, Europe's second- biggest, toward a slump. The CBI, Britain's biggest business lobby, said in a report its measure of optimism slid to minus 60, from minus 40. `Limit Downturn' The survey ``is the start of the very bad data that will only support the need for aggressive fiscal and monetary action,'' Divyang Shah, chief strategist in London at CBA Europe Ltd., a unit of Commonwealth Bank of Australia, wrote in a report. ``The key focus now from policy makers is to limit the depth and duration of the downturn.'' The yield on the U.K. two-year note fell 8 basis points to 3.41 percent. The 4.75 percent security due June 2010 rose 0.14, or 1.4 pounds per 1,000-pound face amount, to 102.10. The yield on the 10-year note was little changed at 4.60 percent. Bond yields move inversely to prices. The difference in yield, or spread, between the two- and 10-year gilts was 118 basis points, the widest since October 1996, as investors favored shorter-dated notes on speculation the Bank of England will lower borrowing costs to revive the economy. The implied yield on the March sterling interest-rate futures contract was at 3.83 percent, down from 4.1 percent a week ago. The central bank's main interest rate is 4.50 percent. The government said last week it would buy stakes in Royal Bank of Scotland Group Plc, HBOS Plc and Lloyds TSB Group Plc to shore up their finances and restore confidence. Bailout Auctions To help finance the bailout, the Treasury auctioned 4.75 billion pounds of notes yielding 3.85 percent today. Investors bid for 2.29 times the amount of securities offered. In the first auction yesterday, the Treasury sold 1 billion pounds of notes due 2009 yielding 3.03 percent. Investors bid for 2.13 times the securities offered. ``The supply is there to satiate strong demand for government bonds,'' said Alessandro Tentori, a fixed-income strategist in London at BNP Paribas SA, France's biggest bank. ``As long as we're in a crisis, I'm not too worried about supply.'' One more auction is planned this week, with 3 billion pounds of notes due 2018 to be sold on Oct. 23. To contact the reporter on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net

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