Pound tumbles to record low versus euro

Sterling slumped to a record low against the euro and a 12-1/2-year low on a trade-weighted basis on Thursday due to concern that a steep economic downturn will force the Bank of England to cut interest rates further. The pound also tumbled against the dollar, hitting a 6-1/2-year low.
The weakness of recent UK data has stoked expectations that the Bank of England's decision to cut interest rates by 1.5 percentage points to 3.0 percent last week will not prevent a prolonged and painful recession.
Further rate cuts are therefore expected, with some analysts predicting a fall to 1.50 percent or lower by early 2009. "Sterling is being sold because of concerns about how bad the UK economy is going to get and how much debt it has," Bank of New York Mellon currency strategist Neil Mellor said.
The pound hit a record low of 84.93 pence against the euro, down about 1.5 percent on the day. Against the dollar, the pound fell 0.8 percent at $1.4807, having earlier hit a low of $1.4775, its weakest since mid-2002.
On a trade-weighted basis, the pound fell as low as 81.6, its weakest since April 1996. Sterling's rapid descent also boosted implied volatility, with one-month sterling/dollar options rising as high as 28.90 percent earlier in the day, approaching a record high.
"The UK is in the eye of the storm because of its love affair with the housing market and it has levels of debt that are far higher than in the US, Germany and Japan," the Bank of New York Mellon's Mellor said. Britain's budget deficit swelled to its largest in at least 60 years in the six months to September, to above 37 billion pounds, data showed last month.
Mellor said there are few reasons to buy sterling at the moment given UK interest rates were below eurozone rates and set to fall further. Bank of England Governor Mervyn King said on Wednesday he would be prepared to cut rates further to boost the economy.
The comments followed the release of the BoE's quarterly inflation report, which said the economy would shrink sharply next year as the credit crisis takes its toll and that the inflation rate may fall below 1 percent in two years - well below the central bank's 2.0 percent target rate. "The path of least resistance at the moment is sterling weakness," said Kamal Sharma, G10 strategist at J.P. Morgan Chase in London.