The pound slid to the lowest level since 1985 against the dollar and posted its biggest weekly drop in three months after a report showed the U.K. economy shrank more than forecast in the fourth quarter. The U.K. currency also declined versus the euro as the economy suffered its biggest contraction since 1980. Bank of England Governor Mervyn King said on Jan. 20 that officials may start buying assets within weeks, after cutting interest rates to the lowest level since 1694. The economy has now shrunk for two consecutive quarters, the definition of a recession. “The fiscal and monetary measures highlight just how bad things are, and that’s really turned sentiment against sterling,” said Ian Stannard, a senior currency strategist at BNP Paribas SA in London. “Sterling is going to remain under severe pressure. We’re going to get continuing bad news on the economy.” The pound dropped as much as 2.7 percent to $1.3503, the lowest level since September 1985, before trading at $1.3681 at 5:56 p.m. in London. The pound fell more than 7 percent this week, the biggest drop since the five days ended Oct. 24. Against the euro, sterling weakened 0.6 percent to 94.29 pence, extending its weekly decline to 4.7 percent. Gross domestic product fell 1.5 percent from the previous three months, the Office for National Statistics said today in London. Economists predicted a contraction of 1.2 percent, according to the median of 33 estimates in a Bloomberg survey. U.K. Recession The pound tumbled this week as U.K. unemployment climbed in December to the highest level in nine years and home repossessions almost doubled in the third quarter. The number of people receiving jobless benefits in Britain rose by 77,900 to 1.16 million, the highest level since January 2000, the statistics office said on Jan 21. Banks took possession of 13,161 properties, 92 percent more than a year earlier, the Financial Services Authority said the next day. “The U.K. economic backdrop is worrying,” said Jeremy Stretch, a senior currency strategist in London at Rabobank International. “We’re in an economic downturn. We may well have another attempt at parity” of the pound versus the euro. The Bank of England will cut its main interest rate, currently 1.5 percent, by a half-percentage point when it meets on Feb. 5, a Credit Suisse Group AG index of derivatives showed. The central bank may buy securities such as corporate bonds and commercial paper to counter the global financial crisis, King said on Jan. 20 in Nottingham, England. It will be “weeks and not months” before a program of purchases begins, he said. Two-year government notes advanced for a second week, with the yield falling 14 basis points, or 0.14 percentage point, to 1.45 percent. The 10-year gilt yield rose 40 basis points in the week to 3.69 percent, increasing the spread between the two securities to 2.24 percentage points, the widest level since at least January 1992, when Bloomberg began gathering the data.

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