The pound dropped against the euro and the dollar for a second day on speculation economic reports this week will add to evidence the Bank of England needs to cut interest rates further to revive growth. The British currency also slipped versus the Swiss franc and the Australian dollar before surveys that may show house prices and consumer confidence fell and factories raised prices at the slowest pace in at least a year. A report today showed the construction industry shrank in January. The Bank of England will cut its key rate 50 basis points to a record low of 1 percent Feb. 5, a Bloomberg News survey of 61 economists showed. “Given the combination of U.K.-specific and global risks, we see further scope for the U.K. to disappoint or even a currency crisis,” said Michael Klawitter, a currency strategist in Frankfurt at Dresdner Kleinwort. “In the near term, the pound may find some support because a lot of short positions have already been built. We still expect the currency to fall toward parity with the euro over the next few months.” The pound weakened to 90.76 pence per euro as of 1:57 p.m. in London, from 90.03 pence yesterday. It declined to $1.4196, from $1.4264. Against the franc, the U.K. currency fell to 1.6380, from 1.6566, and traded at 2.2169 versus the Australian dollar, from 2.2585 yesterday. The pound’s trade-weighted index, a gauge of performance versus its principal trading partners, slipped to 73.43, from 73.88. ‘Reykjavik-on-Thames’ Investors should be wary of betting the U.K. will have a currency crisis similar to that experienced in Iceland, according to Jim O’Neill, head of global economic research at Goldman Sachs Group Inc. Vodafone Group Plc, the world’s largest mobile-phone company, said today the pound’s decline helped it post a 14 percent increase in third-quarter sales. “The pound is very cheap for the first time in our professional history,” O’Neill said today at a foreign-exchange seminar in London. “You need to make sure that the U.K. is Reykjavik-on-Thames before you bet against the pound.” Iceland’s krona slid 46 percent against the euro last year after the collapse of the banking system prompted an exodus of foreign capital and forced the government to seek a bailout from the International Monetary Fund. The pound tumbled 23 percent against the euro last year. It’s up 5.8 percent this year. Pound Support The pound will “hold up” against the European common currency even as it weakens against the dollar and the Japanese yen because the U.K. may emerge from the crisis sooner than the euro region, said Ian Stannard, a currency strategist in London at BNP Paribas SA. “I don’t think the market has fully taken on the severity of the slowdown in Europe,” Stannard said. “We will get a lot more bad news from the euro zone. We’ve seen some downgrades in terms of economic forecasts, but I don’t think it has gone anywhere near enough.” A construction index, based on a survey of purchasing managers at building companies, was at 34.5, compared with 29.3 in December, which was the lowest since the survey began in April 1997, the London-based Chartered Institute of Purchasing and Supply and Markit said today. A reading below 50 indicates contraction. Construction accounts for 6 percent of the economy. Two-year gilts fell after an auction of 3.75 billion pounds ($5.3 billion) of 3.25 percent securities due 2011, part of a record 146.4 billion pounds of bonds the government plans to sell in the fiscal year ending March 31. Gilts Decline The sale drew bids for 2.01 times the amount of securities on offer, compared with 1.57 times in the previous auction in December and an average of 2.1 percent. The average yield was 2.135 percent, the lowest yield on record for a conventional bond, compared with 2.594 percent at the December auction, according to the Debt Management Office. “The market made room for more supply, and that perhaps explained the concession or the rise in yields today,” said Sean Maloney, a fixed-income strategist in London at Nomura International Plc. “There’s room for yields to come down after the market absorbed this bond. The economic outlook remained bleak.” The yield on the two-year note climbed 10 basis points to 1.61 percent. The price of the 4.25 percent security due March 2011 fell 0.23, or 2.3 pounds per 1,000-pound face amount, to 105.39. The 10-year yield rose one basis point to 3.71 percent. Bond yields move inversely to prices. A basis point is 0.01 percentage point.

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