The pound will extend its decline after reaching a 23-year low and bottom out at $1.25 by the third quarter of this year as the global financial crisis and the recession in the U.K. worsen, according to Brown Brothers Harriman & Co. “The weakness of the economy is a sign of how deep the recession is and how bad the situation is there, so that’s weighing on the pound,” said Meg Browne, a senior currency strategist at Brown Brothers Harriman in New York, in an interview on Bloomberg Television. “Our view on the sterling is that it gets to $1.25.” The pound declined as much as 2.7 percent to $1.3503 today, the lowest level since September 1985. Sterling was headed for a 7.3 percent weekly drop, the biggest since October. The U.K.’s gross domestic product fell 1.5 percent in the fourth quarter, the biggest decline since 1980, the Office for National Statistics said today in London. Deleveraging and speculation the dollar is “the currency that people don’t want to leave in the middle of a crisis” will drive sterling and the euro lower in coming weeks, Browne said. The euro declined today as much as 1.8 percent to $1.2765, the lowest since Dec. 8, and was poised for a fourth weekly loss against the dollar after Europe’s manufacturing and service industries contracted in January for an eighth month. Treasury secretary nominee Timothy Geithner’s statement that China is manipulating the yuan doesn’t mean President Barack Obama’s administration is making a major policy shift, Browne said. “The new administration is going to examine all the measures it can to deal with the situation and deal with the global economic crisis as well,” Browne said.

Source