Page last updated at 22:05 GMT, Monday, 29 December 2008

Pound hits new low against euro


The pound has hit a new record low against the euro as the grim outlook for the UK economy continues to put downward pressure on the currency.

Weak house price data and figures showing that homeowners are choosing to repay their mortgages rather than spending, pushed the currency lower.

Low trading levels in the foreign exchange markets also helped to force sterling down to 1.0198 euros.

Many analysts believe parity with the euro is now only a matter of time.

The rate for tourists buying their currency before they travel has almost reached parity, where one pound buys one euro. At one major High Street currency exchange, 100 euros currently costs 99.11.

Downward pressure

Property consultants Hometrack predicted a 12% fall in UK property prices in 2009, while figures from the Bank of England showed that households were more keen to pay off their mortgages than borrow money against the value of their homes for spending.

The path to parity is self-fulfilling
Daniel Baker, Informa Global Markets

Towards the end of October, one pound bought 1.287 euros. But a string of bad news about the prospects for the UK economy caused sterling to fall.

In December last year, a pound would have bought more than 1.4 euros. At its peak in 2000, the pound was worth more than 1.7 euros.

There are two main factors putting downward pressure on the pound, analysts suggest.

First, interest rates in the UK are lower than those in the eurozone, which makes the pound less attractive to foreign investors.

Analysts believe the economic slowdown in the UK will be more severe than in the eurozone, which means the Bank of England could be forced to lower interest rates from their current level of 2%.

Interest rates in the eurozone currently stand at 2.5% and the European Central Bank has hinted that further rate cuts are unlikely early in the New Year.

Second, trading levels over the holiday period are low, which means that any moves in exchange rates are exaggerated.

"Actual liquidity levels are painfully thin," said Daniel Baker at Informa Global Markets.

He believes parity with the euro is almost inevitable.

"The path to parity is self-fulfilling," he said.

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