By Matthew Brown Dec. 11 (Bloomberg) -- The pound slid to a record against the euro for a fourth day after a U.K. index of manufacturers’ output expectations matched the lowest level in almost 30 years, strengthening the case for deeper interest-rate cuts. The British currency also weakened versus the South Korean won and the Canadian dollar after the Confederation of British Industry’s gauge of output expectations for the next three months stayed at minus 42, the same as November and the lowest level since 1980. The pound depreciated 17 percent against the euro this year as the economy slipped into its first recession in 17 years. “The U.K. output data is a confirmation that the base rate is on a downward trajectory,” said Neil Jones, head of European hedge fund sales at Mizuho Capital Markets in London. “As long as the U.K. continues to move towards a zero interest-rate policy then the pound will underperform.” The pound weakened as much as 1.2 percent to 89.09 pence and was at 88.93 pence as of 5:22 p.m. in London, from 88.08 pence yesterday. Against the dollar, the British currency strengthened to $1.5028, from $1.4785. The Bank of England reduced its benchmark interest rate to 2 percent on Dec. 4 from 5.5 percent at the start of the year as policy makers sought to limit the fallout from the global financial turmoil. The European Central Bank cut its main rate to 2.5 percent the same day. For the pound to check its decline against the euro “we’ll need to see some evidence the data’s improving and the central bank can maybe at least slow the pace of easing if not stop,” Adrian Schmidt, a senior foreign-exchange strategist at Royal Bank of Scotland Group Plc in London, said in a Bloomberg TV interview. Lower Expectations U.K. consumers’ predictions for inflation in the next year dropped the most since at least 1999 last month as the economic slump deepened, a survey for the Bank of England showed today. The pound may weaken to 91.5 pence per euro this year, the equivalent of an all-time low for the pound against the German mark, Mizuho’s Jones said. “If the ECB continues to be stingy with rate cuts then we could see parity in the first quarter of 2009, but we’re not betting on it,” said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London. “Sentiment has gone so far against the pound that anything is possible.” The pound will strengthen to between 83 pence and 85 pence per euro by the end of the second quarter, Merrill Lynch & Co. analyst Emma Lawson wrote in a note today. Pound-Dollar “The euro will come under additional pressure as the economic outlook continues to deteriorate and the ECB is required to ease interest rates to their lower threshold,” she wrote. The U.K. currency will rise next year to $1.65 because the U.S. trade deficit won’t narrow, according to Goldman Sachs Group Inc., which said the forecast is among its top seven recommendations for 2009. “Renewed dollar weakness and a relative sterling recovery will likely boost cable during the course of 2009,” Goldman Sachs analysts including Jim O’Neill and Thomas Stolper in London and Jens Nordvig in New York wrote in a report dated yesterday. U.K. two-year government notes advanced, pushing the yield down four basis points to 1.81 percent. The 4.75 percent security due June 2010 gained 0.06, or 60 pence per 1,000-pound ($1,498) face amount, to 104.30. The yield on the 10-year gilt was at 3.60 percent. Yields move inversely to bond prices. The U.K. Debt Management Office sold 3.5 billion pounds of 4.5 percent gilts due 2013. Demand was 1.96 times the amount of securities offered, compared with a so-called bid-to-cover ratio of 2.10 times at an auction on Oct. 16. To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net

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