Monday in Asia, the pound slumped to a fresh record low against the euro after a report showed that house prices in the UK declined in December as the economy sinks deeper into a recession. The pound also plummeted to a new multi-year low against the Swiss franc.
House prices in the UK declined 8.7% in 2008 and expect it to fall 10% next year, according to a monthly survey released today by property consultant Hometrack. Home sales decreased 45% this year. On a monthly basis, house prices are down 0.9%, slightly better than the 1.1% decline in November.
Hometrack's director of research, Richard Donnell said the onset of recession and the prospect of rising unemployment over 2009 will continue to dampen confidence and, in turn, demand, which will inevitably lead to further house price falls in the next 12 months.
Last week, the Royal Institution of Chartered Surveyors had predicted that house prices would decline further in 2009 on cautious mortgage lending.
A report released by the British Bankers' Association on December 23 showed that the number of house purchases approved in the UK fell to 17,773 in November from 20,767 in the previous month. Approvals for re-mortgaging in November were almost half what they were in October and the previous six months.
The pound plunged to a new record low of 0.9665 against the euro in Asian trading on Monday, hurt by its yield disadvantage against the single European currency and inching closer to parity. The euro-pound pair was worth 0.9614 at last week's close.
The bleak outlook for the UK economy and expectations that euro zone interest rates are likely to stay higher than British rates in coming months, pushed sterling down.
The British pound headed for a second annual loss versus the euro as the U.K. economy sank deeper into a recession and the Bank of England slashes its interest rates to 2 percent, the lowest level since 1951.
The Bank of England is still expected to cut rates in coming months to support the U.K. economy, which seems to be in worse shape than the euro-zone's economy.
Britain's economy shrank at its fastest pace since 1990 in the three months to September, spurring fears of a deep and prolonged recession. The Office for National Statistics said on December 23 that the UK economy shrank 0.6% sequentially in the third quarter, revised down from last month's estimate of 0.5% fall. This was the largest decrease since the fourth quarter of 1990.
The UK currency has fallen 24% against the euro this year, the most since the euro's debut in 1999. If the pound weakens further, it may trade at parity with the euro in the coming weeks. While a weaker pound may buoy manufacturers by making British goods more competitive overseas, the drop has not yet shown up in export data as helping companies.
The U.K. trade deficit widened to 7.75 billion pounds in October from 7.36 billion pounds the previous month, the Office for National Statistics said on December 9. Imports fell 1.2 percent and exports dropped 3.4 percent.
The pound's slump has been driven primarily by the UK's greater reliance than the eurozone on services, once the country's great engine of growth, and particularly financial services.
This has seen the effects of the credit crisis spill over more quickly into the real economy, hitting UK house prices and prompting a series of aggressive interest rate cuts from the Bank of England.
Moreover, as the financial crisis has deepened and the UK government has moved to bail out the country's ailing banking system, concerns over the country's finances have weighed on the currency.
While these concerns have been driving pound steadily lower since the summer, the severity of the pound's slump last week has been triggered by the realisation that the UK authorities look set to take more drastic monetary policy action to combat the financial crisis. Last week, the pound has slipped 3% against the euro.
Charlie Bean, the Bank of England's deputy governor, said last week that zero interest rates were a possibility and that the government was likely to pump billions more pounds into the banking system as the economy kept slowing.
That raised the prospect that not only the BoE is likely to make a further, aggressive interest rate cut at its next meeting in January, but that it might follow the US and adopt a quantitative easing approach to monetary policy.
The pound, which closed Friday's trading at 1.5629 against the Swiss franc slipped to a new multi-year low of 1.5527 during Asian deals on Monday. The next downside target level for the pound-franc pair is seen at 1.54.
The pound has depreciated 14% against the franc earlier this year to touch an 11 1/2 -year low of 1.9389 on March 17. Thereafter, the UK currency recovered and bounced between 2.0973 and 2.0021 in the succeeding months. But the pound started its downward journey in late August and has plunged around 24% thus far.
Against the currencies of US and Japan, the pound showed strength in early Asian trading on Monday but reversed direction by about 8:55 pm ET. The pound fell to 132.61 against the yen and 1.4649 against the dollar at 11:55 pm ET compared to earlier highs of 133.58 and 1.4736, respectively. If the UK currency slides further, it may likely target 132.1 against the yen and 1.460 against the dollar. The pound-yen pair closed trading at 132.64 and the pound-dollar pair at 1.4610 on Friday
The French final third quarter GDP, Italian December business confidence and the Swiss KOF leading indicator for December are expected to influence trading in the European session today.
From US, there are no significant economic reports due to be released.
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