Sterling takes another pounding against euro

The pound dropped to a new low against the euro yesterday as deepening gloom about the British economy raised expectations that the currencies would hit parity this week.

Sterling dropped 1.9 per cent and finished the day with £1 worth €1.022. It also dropped to a record low on a trade-weighted basis against a select basket of currencies, according to daily Bank of England figures which date back to 1990. Analysts said equal value between the pound and the euro was likely this week, ahead of probable further UK interest rate cuts to reduce the impact of the recession.

The low volumes of trading on near-deserted dealing room floors have also exaggerated the effect of negative sentiment towards the currency.

"Another day like today and we are pretty much there [at parity]," said Daragh Maher, currency strategist at the investment bank Calyon. "We have had close to a 2 per cent move and with pretty thin liquidity this week there is every possibility that the trend extends."

The euro has gained by almost one-third against sterling this year and has jumped 18 per cent this month as the Bank of England slashed interest rates. Fears have grown that the UK is more exposed to recession than the Eurozone, and forecasts yesterday suggested 600,000 jobs could be lost next year with a succession of retail bankruptcies and the prospect of further house price falls adding to the unease. Sterling suffered across the board yesterday, slipping 0.1 per cent against the dollar to $1.4630 and 0.8 per cent against the yen to a 13-year low of ¥131.72.

Parity between sterling and the euro would be a symbolic blow for Gordon Brown, who repeatedly urged Eurozone countries to copy Britain's liberalised financial and labour markets when the UK economy was growing. George Osborne, the shadow Chancellor, said: "As Gordon Brown himself says, a weak currency is a reflection of a weak economy and a weak government. Labour is bankrupting Britain again and the rest of the world knows it."

A weak currency may also dent Britain's battered domestic confidence in the short term, even though it can benefit the economy by boosting exports. Alan Clarke, a UK economist at BNP Paribas, said: "Our two main trading partners, the US and the Eurozone, are very weak at the moment so sterling's weakness is not going to prevent a bloodbath for consumers and fixed investment, and it will not drive recovery until the back end of 2009. In the short run, the man on the street feels it mainly in the high price of going on holiday to Europe and that may hurt confidence. Most people would not see a weaker pound as a good thing."

Financial markets expect British interest rates, which currently stand at 2 per cent, to fall close to zero early next year. The European Central Bank has been more cautious in cutting its benchmark rate, which stands at 2.5 per cent. Britain's lower interest rates and the prospect of further cuts make the Eurozone more appealing for investors now, but the euro's appeal could wane in the new year if the Bank of England's more aggressive rate-cutting takes effect and stimulates quicker economic recovery.

"The pound has been marked down for coming interest rate cuts but it could be marked up because the rate cuts deliver some growth," Mr Maher said.