- The Washington Times - Thursday, August 14, 2008

LONDON | The British pound slid to a 22-month low against the dollar Wednesday after the Bank of England cut its growth forecast and held out the prospect of lower interest rates.

The pound fell for a ninth straight day against the greenback as Bank of England Governor Mervyn King said he saw a “chill in the economic air” after unemployment rose in July by the most in almost 16 years. The currency’s 5.9 percent decline since July 31 is its largest since February 1993, when Britain was emerging from two years of recession.

“Given the way growth has gone, it’s not going to help killing the economy so the Bank of England can kill inflation,” said Divyang Shah, chief strategist in London at CBA Europe Ltd. “Now that the dollar has turned, sterling is now the liability currency. It has to play catch-up to all the negative economic news.”

The British currency fell 1.4 percent to $1.8704 in New York from $1.8968 Tuesday. It was as high as $2.0157 four weeks ago. Mr. Shah said his new target for the pound is $1.80 over the next three to four weeks.

Not since July 2005, when slowing economic growth and falling house prices presaged a cut in interest rates the following month, has the pound dropped for nine consecutive days against the dollar.

The depreciating currency underlines concern that a slumping housing market is pushing Europe’s second-biggest economy toward a recession. A drop in house prices in July brought the real estate market to a “virtual standstill,” the Royal Institution of Chartered Surveyors said Tuesday. The economy will grow about 0.1 percent in the first quarter of 2009, compared with a previous prediction of 1 percent, according to bank forecasts published Wednesday.

“It may still be summer, but there is a feeling of chill in the economic air,” Mr. King said at a news conference in London after the release of the central bank’s quarterly inflation report. The economy faces a “difficult and painful adjustment” that “cannot be avoided. As a result, inflation is rising and growth is slowing.”

The next key level for the British currency is at $1.8620, said Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in New York. Below that, it may fall to $1.76.

“It could struggle to go a lot lower until we get more evidence that the bank is going to cut rates,” said Adrian Schmidt, a London-based senior currency strategist for Royal Bank of Scotland Group PLC.

“Overall the market will be looking through this peak of inflation and at the deteriorating growth prospects,” said Ian Stannard, a London currency strategist for BNP Paribas SA. “That is going to be enough to put sterling under pressure.”

The pound may fall to $1.85 by year’s end, Mr. Stannard said.

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