Pound Drops for Fourth Week as Northern Rock Worsens Sentiment

By Gavin Finch and Anchalee Worrachate

Sept. 29 (Bloomberg) -- The pound dropped for a fourth week against the euro after the Financial Times reported that Northern Rock Plc had been forced to borrow a further 5 billion pounds ($10 billion) to stay in business.

The U.K. currency traded near the lowest in more than 2 1/2 years yesterday, posting its worst quarterly performance since March 2003, as an Organization for Economic Cooperation and Development report showed a real-estate slump may be crimping the wider economy. Interest-rate futures suggested there's a greater chance than a month ago that the Bank of England will cut interest rates from 5.75 percent.

The Northern Rock loan ``indicates there are still reasons to be cautious on the outlook for risk,'' said Kamal Sharma, a London-based currency strategist at Bank of America Corp. ``We're not out of the woods yet.''

The pound traded at 69.79 pence per euro by 4:10 p.m. in London yesterday, near the lowest since January 2005, and down from 69.75 pence at the end of previous week.

It fell almost 4 percent this quarter against the common European currency.

``There is now a risk that growth will be weaker going forward, which could imply a need for interest-rate reductions,'' the Paris-based OECD said this week in its economic outlook. ``The interest-rate increases over the last year, together with recent financial-market volatility, are expected to slow the housing market'' in the U.K.

The U.K. currency rose to $2.0379 yesterday, from $2.0203 a week before. It's advanced against the dollar for the past seven quarters.

Dollar Weakness

The dollar fell against 14 of the 16 most-traded currencies tracked by Bloomberg this quarter on speculation losses on subprime mortgages are having a worse effect on the U.S. than on many other countries.

The pound was also hurt against the euro after a report on behalf of the European Commission yesterday showed U.K. consumer confidence fell to a six-month low in September.

Gilts advanced yesterday as investors sought the relative safety of government debt. The yield on the two-year note fell 10 basis points to 5.04 percent. The price of the 4 percent security due March 2009 rose 0.14, or 1.4 pounds per 1,000-pound ($2,032) face amount, to 98.58.

The 10-year gilt yield dropped 5 basis points to 5.01 percent. U.K. bonds also advanced this quarter as U.S. subprime losses spread.

The implied rate on the December interest-rate futures contract fell 7 basis points yesterday and 14 basis points in the past month to 6.07 percent. That's its second monthly decline this quarter.

The contract settles to the three-month London interbank offered rate for the pound, which has averaged about 16 basis points more than the benchmark rate, currently 5.75 percent, over the past decade.