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The Independent Online
THE BRITISH pound is expected to fall against the German mark this week on expectations that the Bank of England will not raise rates soon, and may even cut rates by the end of the year.

Britain's global trade deficit widened to pounds 4.690bn in the quarter ended March, the largest quarterly deficit since the second quarter of 1990.

The worsening trade balance is likely to drag on UK growth, increasing the likelihood that UK interest rates will not head higher.

"Further deterioration in the trade picture for the UK will be a weight on sterling," said Avinash Persaud, head of currency research at JP Morgan.

He added that the pound could fall as low as DM2.70 and $1.55 by the year's end.

On Friday sterling rose to DM2.9116, leaving it up 1.59 per cent last week. It rose to $1.6325 from $1.6270, up 0.335 per cent on the week.

All but one of 20 economists surveyed by Bloomberg News expect the Bank of England's Monetary Policy Committee to keep its benchmark lending rate at 7.25 per cent when it holds its monthly meeting this week.

Seven of those polled forecast that central bank policy makers will cut the rate to 7.00 per cent by the end of the year. Lower lending rates diminish the allure of sterling deposits and bonds.

A report on Thursday showed that sterling's strength - which makes British exports more expensive -- is hurting British exporters.

A survey by the Confederation of British Industry found that 60 per cent of manufacturers consider their export orders fell below normal for the month, compared with 9 per cent who said they were above normal.

That was the worst reading since January 1983.

"We should be looking for a downward revision in GDP growth on the basis of such reports," said Brian Hilliard, chief economist for fixed income at Societe Generale Strauss Turnbull.

The CBI also forecast a tame inflation environment this year, and that base rates will fall to 7.0 per cent in the fourth quarter.

On Friday, the pound rose against the mark after Moody's Investors Service cut the foreign currency debt ratings for Russia and nine of its banks. Germany is Russia's biggest lender and trading partner, so Russian economic woes can sour investors and traders on marks.

"Whenever you see a downgrading of economic prospects in Russia, you seea move away from German marks, for safe haven reasons and because the German economy has significant investment in the region," said Jeremy Stretch, a currency strategist at Natwest Markets.

Moody's cut Russian debt to four notches below investment grade, putting it one level below Romania's, citing political instability and increased risk that Russia may default on its loans.

The move helped drag the benchmark Russian Trading System index to an 18-month low, leaving it down 16 per cent this week.

The credit rating company also lowered the long-term foreign currency deposit ratings for nine Russian banks.

Copyright: IOS & Bloomberg