By Anchalee Worrachate Nov. 28 (Bloomberg) -- The pound fell against the dollar, paring its biggest weekly advance since January 2006, as stocks declined and reports added to evidence the global credit crisis is battering the British economy. The U.K. currency also dropped versus the Japanese yen as the FTSE 100 Index slid for the second time in three days, a gauge of consumer confidence stayed close to a more-than-three- decade low and an index of retail sales matched the lowest level in at least 25 years. The pound rallied 2.7 percent versus the dollar this week as a rebound in stocks rekindled investor demand for higher-risk assets. “The rebound in equity markets provided some support for sterling in the near term and I wouldn’t rule out it pressing higher in coming days,” said Ian Stannard, a foreign-exchange strategist at BNP Paribas SA in London. “Longer term though, I still believe sterling is vulnerable. We expect its recent rally to run out of steam in the middle of next week. The economic outlook will continue to weigh on the currency.” The pound dropped to $1.5313 as of 12:47 p.m. in London, from $1.5406 yesterday and as high as $1.5448 earlier. It strengthened to 82.95 pence per euro, from 83.57 pence. The pound will fall to $1.4100 by year-end, BNP Paribas said. The seizure in credit markets and an approaching recession have sapped consumer demand in Europe’s second-largest economy, prompting the Bank of England to cut borrowing costs four times this year from 5.50 percent. Policy makers this month reduced the key interest rate by 150 basis points to 3 percent, the lowest since 1955. The pound dropped 4.6 percent against both the dollar and the euro this month. Gilts Rise U.K. gilts rose today as investors sought the relative safety of government bonds, with two-year notes rose snapping four days of losses. The gains pushed the yield eight basis points lower to 2.58 percent. The price of the 4.75 percent due March 2010 climbed 0.10, or 1 pound per 1,000-pound ($1,534) face amount, to 103.69. The yield on the 10-year note dropped three basis points to 3.76 percent. Yields move inversely to bond prices. The “big issue” for the British economy is to get banks to lend again, Timothy Besley, a member of the Bank of England’s Monetary Policy Committee, said yesterday. The central bank’s next interest-rate decision is due on Dec. 4. Policy makers will cut borrowing costs by at least another 75 basis points to 2.25 percent next week, according to a Credit Suisse Group AG index of probability based on overnight index- swap rates. Gilts Versus Bunds “If that’s the market consensus, then the two-year yield at the current level is a steal,” said Jason Simpson, a fixed- income strategist at Royal Bank of Scotland Group Plc in London. “The market is expecting aggressive rate cuts ahead and that should support the front end of the market.” Gilts beat their European counterparts this month, handing investors a 5 percent return, compared with a gain of 3.8 percent on German bonds, according to Merrill Lynch & Co. U.K. Gilts and German Federal Governments indexes. The looming recession in the U.K. caused to investors to raise bets on deflation in the past month. The five-year breakeven rate, a gauge of inflation expectations as measured by the difference in yield between regular bonds and index-linked debt, was minus 91 basis points today, compared with a positive 105 basis points at the start of November. The economic pessimism is “overdone,” leaving the securities at “attractive levels,” Steve Major, HSBC Holdings Plc’s head of fixed-income strategy in London, wrote in a note to clients received by e-mail yesterday. “At some stage, the market will look beyond the deflation discounted for 2009 and to the risks of rising inflation by 2010-11.” To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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