Sterling set for record yearly loss vs euro

Written by Reuters | London | Updated: Dec 31 2008, 21:04pm hrs
Sterling steadied in quiet trade on Wednesday, on track for its worst yearly performance against the euro since the single currency's inception almost a decade ago as a bleak outlook for Britain's economy hobbled sentiment.

Worries about rising UK unemployment, deteriorating public finances and aggressive rate cuts have pummelled the pound in recent months.

The 26-year highs hit just over a year ago above the psychologically-key $2 mark are a dim and distant memory.

Sterling's 27 per cent slide against the dollar over the year to date looks would be the sharpest since the gold standard monetary system was abolished in 1971.

The pound hovered at 97.37 pence, near Tuesday's record lows against the euro and just over two pence shy of parity.

Analysts said there was nothing to prevent further losses.

"There's a lot of talk about just how much oxygen remains for euro/sterling at these sorts of heights," said Neil Mellor, currency strategist at BONY Mellon in London.

"But ultimately I think there's a significant chance of UK interest rate expectations falling further ultimately towards where US rates are. Pending some volatility I think we will see parity and perhaps even beyond that."

Against the dollar, the pound was flat at $1.4442, having hit 6-1/2 year lows the previous day at $1.4380.

This year's sharp falls against the currencies of the UK's main trading partners brought the pound to successive historic lows on a trade-weighted basis, according to daily records kept by the Bank of England going back to 1990.

On Wednesday, trade-weighted sterling was at 73.5, having slipped to 73.3 in the previous session.

The euro has soared by over 32 per cent against the pound this year, jumping almost 18 per cent so far this month alone.

YIELD IN FOCUS

Lower UK interest rates compared with the euro zone have become the latest reason to sell sterling against the euro.

The Bank of England has slashed rates by three points since October to 2 per cent, leaving them lower than the 2.5 per cent in the euro zone, with more cuts expected in 2009.

Markets have fully priced in a cut in rates to 1.5 per cent when the BoE meets on January 8, while indicating the possibility of a bigger reduction.

"Further reductions will be seen during the early part of 2009 as the race to zero continues," said James Hughes, market analyst at CMC Markets in London in a note to clients.

Yields on UK 10-year government bonds have fallen faster than their counterparts in the euro zone, pushing the spread between the two to its narrowest in around six years according to Reuters charts.

Economists forecast a sharp contraction for the British economy next year and fear high UK government debt levels will limit room for additional stimulus measures to temper recession.