The pound dropped to the lowest level in seven weeks against the euro after a government report showed unemployment increased in February at the fastest pace since at least 1971 as the recession deepened. Sterling also fell against the dollar after the Office for National Statistics said the number of people receiving unemployment benefits increased by 138,400, compared with 84,800 forecast by economists in a Bloomberg survey. The economy will probably contract into next year after most of the Group of Seven economies begin to recover, the International Monetary Fund will say this week, the Times of London reported. “It’s catastrophic,” said Russell Jones, head of fixed- income and currency research in London at RBC Capital Markets, a unit of Canada’s largest bank. “The labor market data will dominate trading, and we’ll end up with a weak tone for sterling.” The pound fell as much as 1.6 percent to 94.16 pence per euro, the weakest level since Jan. 27, and was at 93.88 at 12:04 p.m. in London, from 92.69 yesterday. Sterling decreased as much as 1.6 percent versus the dollar, the biggest intraday decline since March 9, to $1.3845, and was at $1.3880. Sterling may extend losses even as the “bulk of the correction has already occurred,” Jones said, without providing a specific forecast. Bank of England Bank of England policy makers voted unanimously to start printing as much as 75 billion pounds ($105 billion) to fight the recession as they cut the benchmark interest rate to a record low of 0.5 percent, according to minutes of the March 5 decision released in London today. Chancellor of the Exchequer Alistair Darling has given the central bank authority to buy up to 150 billion pounds of assets. The number of people receiving jobless benefits climbed to 1.39 million last month, the statistics office said today. A broader measure of unemployment climbed above 2 million for the first time since 1997, and incomes grew at the slowest pace since at least 1991. “The market is still concerned about the U.K. economy and that there’ll be more problems in the housing and banking sectors,” said Lutz Karpowitz, a Frankfurt-based currency strategist at Commerzbank AG, Germany’s second-biggest bank. The currency may decline to 98 pence per euro by the end of June and then recover to 85 pence by year-end as investors shift their focus to the deterioration in the euro-area economy, Karpowitz said. IMF Leak The IMF expects that the U.K. economy will contract by 0.2 percent in 2010 on top of a 3.8 percent decline this year, the Times said, citing leaked IMF projections. It projects the world economy will shrink by 0.6 percent this year, the Times said. “Sterling broke down amid reports that the IMF was to warn the U.K. economy’s contraction may last into 2010,” analysts led by Marc Chandler, head of currency strategy at Brown Brothers Harriman & Co. in New York, wrote in a note. The pound fell 23 percent versus the euro and 26 percent against the dollar last year as the economy slipped into its first recession since 1991. U.K. government bonds were little changed, with the yield on the 10-year gilt holding at 3.07 percent. The 4.5 percent security due in March 2019 fell 0.05, or 50 pence per 1,000-pound face amount, to 112.16. The yield on the two-year note decreased three basis points to 1.46 percent. The difference in yield, or spread, between the two securities widened three basis points to 163 basis points, the most since March 11. A so-called widening of the yield curve indicates preference for the shorter-dated notes, which are perceived to be safer. The Debt Management Office said today it planned to sell a record 147.9 billion pounds government bonds in the fiscal year beginning April 2009 and may hire banks to sell some gilts. The DMO will sell 63.6 billion pounds of conventional gilts in 16 auctions, it said on its Bloomberg page today. It will also issue 20.7 billion pounds of index-linked gilts.

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