Currencies

The pound is expected to fall this week as reports reflect a weak economy in need of lower interest rates, even after the Bank of England cut rates last week for the fourth time in as many months. "Growth is headed towards zero and maybe even negative," said Ciaran Barr, an economist at Deutsche Bank. "We'll see modest downward pressure on sterling next week."

On Friday, the pound touched a four-month low of $1.6355, ending the week 1.4 per cent lower. Against the new euro, sterling strengthened to pounds 0.7045 per euro from 0.7078. The euro began trading on Monday at an initial rate of 0.7055.

The week ahead brings glimpses into the health of UK manufacturing, the labour market, retail sales and inflation. Reports on Monday are expected to show declining output by British manufacturers and slowing inflation. Economists say manufacturing production probably fell 0.4 per cent in November from the month before and slipped 0.5 per cent in the year. Analysts are looking for a 0.1 per cent annual drop in December producer prices, also due on Monday.

December unemployment figures, due for release on Wednesday, could show the largest jump in the number of UK jobless since 1992. Some expect an increase of 20,000, after a rise of 5,900 in November.

The Bank has slashed borrowing costs in an effort to resuscitate a flagging economy. While lower rates encourage growth, they also weaken the pound by reducing the return on money market deposits.

"Our feeling is we'll get further cuts and a weaker pound," said Brian Turner at Henderson Investors. He recommends selling sterling.

The Bank sliced 25 basis points off its benchmark rate on Thursday, lowering it to 6.0 per cent from 6.25 per cent. The Monetary Policy Committee's first easing in more than two years came in October and the benchmark rate has fallen every month since, sliding from 7.50 per cent.

Last week marked the first time since 1991 that the UK made four consecutive interest-rate cuts - and more are expected. The MPC accompanied its latest cut with a warning of a weakening economic outlook. "Domestic data and survey evidence have shown a continuing slowdown in the UK economy," it said. "The risks from the international environment remain clearly on the downside."

Analysts said that was a signal that the cuts aren't over yet. The implied yield on the March sterling interest-rate futures contract, a measure of UK rate expectations, stands at 5.52 per cent. "The MPC remains in a clear easing mode with more rate cuts likely during the next few months," said Tony Norfield, head of global treasury research at ABN Amro.

Investors have seen the return on three-month pound deposits fall 1.37 percentage points to 5.95 per cent since October, while the yield on dollar deposits has slipped only 33 basis points to 5.04 per cent in the same time.

The dollar rose against the euro last week as employment reports in the US and Germany suggested that the US economy will outperform Europe in the next few months. "Expectations for US growth have been on the rise," said Van Bussman, economist at DaimlerChrysler. "In Europe, the growth revisions are downward. That's serving to strengthen the dollar."

The dollar climbed to $1.1557 per euro on Friday. It eked out gains against the yen, amid speculation that rating companies will downgrade Japan''s credit status. Copyright: IOS & Bloomberg

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