Sterling hits new record low against euro

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The Independent Online

Sterling hit a record low against the euro and a basket of currencies today as pessimism about the UK economy was reinforced by a think tank report showing a sharp contraction in growth.

The report, which said the nation's economy shrank more than many believe in the three months to November, kept expectations high that the Bank of England will continue to cut interest rates aggressively.

The pound extended losses as British finance minister Alistair Darling told parliament on Wednesday that sterling depreciation would help the country's exporters.

By 1507 GMT, the pound had fallen to 87.83 pence versus the euro, its weakest since the single currency was introduced in 1999.

Meanwhile, trade-weighted sterling fell to 79.7, the lowest on a daily basis according to Bank of England records going back to 1990.

"There's really not much good to say about the pound, although it has already fallen a long way," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.

Given the prospect of lower interest rates and a rising fiscal deficit, "the risks are still clearly to the downside," he added.

Despite sterling's losses against the euro, it rose 0.6 percent to $1.4829 (GBP=) against a broadly weaker dollar on a slight pullback in risk aversion as global shares gained on news of a tentative agreement to bail out US carmakers.

The National Institute of Economic and Social Research said on Wednesday Britain's economy shrank by a full percentage point in the three months to November and the pace of contraction looked set to accelerate into the end of the year.

"There is every reason to believe that the output decline in the fourth calendar quarter of the year will be larger than one percent in magnitude," it said.

The report came on the heels of dismal data in manufacturing, housing and retail sales on Tuesday, which bolstered expectations that a sharp economic downturn will put more pressure on the central bank to ease rates further.

"Altogether, these readings made a strong case for the United Kingdom ultimately suffering the worst recession in the developed world," Commerzbank analysts said in a research note.

The BoE has cut key interest rates by 300 basis points since October to 2 percent, their lowest since 1951.

BoE policymaker Paul Tucker is appointed deputy governor for financial stability for a five-year term starting next March, and arch policy dove David Blanchflower will step down when his term expires in May, Darling told parliament.