BLBG: Pound Declines Against Dollar as U.K. Housing Slump Deepens
By Lukanyo Mnyanda
Nov. 11 (Bloomberg) -- The pound fell against the dollar and traded near a record low against the euro after U.K. home sales slumped, adding to evidence the economy is mired in a recession.
The pound also declined against the yen after the Royal Institution of Chartered Surveyors said real-estate agents and surveyors sold the fewest homes in the quarter through October since the series began in 1978. Homebuilder Taylor Wimpey Plc said orders fell 40 percent from a year ago, in an ``extremely challenging'' market. A separate report from the British Retail Consortium showed retail sales dropped 2.2 percent in October.
``We've had a lot of bad news in the economy, and in the very short term the pound will weaken some more,'' said Adarsh Sinha, a currency strategist at Barclays Capital in London. ``Part of that will be related to risky assets doing badly.''
The pound dropped to $1.5373, the lowest level since Oct. 27, and traded recently at $1.5411. It fell as much as 0.6 percent to 82.15 pence per euro, the lowest level since the single European currency's debut in 1999, and was at 81.52 at 3:36 p.m. in London, from 81.67 pence yesterday.
The U.K. currency declined 22 percent against the dollar and 10 percent versus the euro this year as Europe's second- largest economy headed toward a recession. The economy shrank 0.5 percent in the third quarter after registering zero growth in the previous three months, government data showed last month.
The pound will likely rebound to trade at $1.70 in six months and 77 pence to the euro in a year, Sinha said. It may trade at $1.66 and 78 pence at the end of 2009, according to the median of analyst forecasts compiled by Bloomberg.
Rate Bets
Traders raised bets the Bank of England will add to interest-rate cuts, with the implied yield on the short-sterling December futures contract falling 10 basis points to 3.43 percent. Policy makers trimmed the benchmark rate last week by 1.5 percentage points to the lowest level since 1955. The 3 percent main rate compares with 3.25 percent in the euro region and 1 percent in the U.S.
The pound's trade-weighted index dropped a seventh day to 81.17 today, the lowest level since Oct. 27, according to indexes compiled by Deutsche Bank AG, the world's biggest currency trader. The index fell to 80.43 on Oct. 24, the weakest since at least January 2000.
The benchmark FTSE 100 Index of stocks retreated 3.3 percent, bringing this year's decline to 34 percent and putting it on course for its worst year on record. The MSCI World Index dropped 4.1 percent.
Traders added bets Britain's currency will fall further against the dollar, futures trading showed.
Hedge Fund Wagers
The difference in the number of wagers by hedge funds and other large speculators on a drop in the pound compared with those on a gain -- so-called net shorts -- was 35,265 on Nov. 4, compared with 33,036 a month before, according to the Washington- based Commodity Futures Trading Commission. They've been betting on a weaker pound since the week through Aug. 5.
Today's data ``will not help keep the pound from sliding further,'' Derek Halpenny, head of global currency strategy in London at Bank of Tokyo-Mitsubishi Ltd., wrote in a client note. ``Financial-market conditions look to be deteriorating and if sustained will be to the benefit of the dollar and yen. The pound and emerging-market currencies could be the biggest losers.''
The pound dropped this year as investors' inflation expectations fell, with the spread between the five-year gilt and its index-linked counterpart declining to the narrowest since at least 1996. The so-called breakeven rate was at 0.45 percentage points.
Rally Possible
The U.K. currency may rally to 73.91 pence per euro, if it manages to end a week stronger than 77 pence, according to technical analysts led by Tom Fitzpatrick at Citigroup Global Markets Inc. in New York. The euro may decline as slowing economic growth prompts the European Central Bank to accelerate the pace of interest rate cuts, they wrote in a note today.
``Yes the ECB cut rates, but firstly they had to reverse their hike in the summer and even still they sound relatively hawkish and confusing as they continue to disappoint,'' the analysts wrote. ``We are increasingly convinced the euro will trade lower in coming months'' against the pound.
U.K. government bonds were little changed, with the yield on the two-year gilt holding at 2.56 percent. The 4.75 percent security due June 2010 fell 0.01, or 10 pence per 1,000 pound face amount, to 103.34. The 10-year yield rose 1 basis point to 4.21 percent. Bond yields move inversely to prices.
The Debt Management Office sold 3.5 billion pounds of 2015 notes today to yield an average 3.99 percent. Investors bid for 1.53 times the amount offered, down from 2.18 times at a sale of the same securities on Sept. 16, 2004.
To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
