Bloomberg.com: U.K. Pound Posts Biggest Weekly Drop Against Euro in Two Years

The pound posted its biggest weekly drop against the euro in more than two years as signs economic growth is slowing fueled speculation the Bank of England will cut its key interest rate as early as next month.

The pound declined against 12 of the 16 most-active currencies in the past week, tumbling to the lowest against the euro in 4 1/2 years. A report yesterday showed retail sales unexpectedly dropped and the central bank this week forecast economic growth will slow ``sharply'' next year and signaled at least one reduction in the benchmark rate.

``Sterling is likely to remain under pressure against the euro this year,'' said Martin McMahon, a currency strategist at Credit Suisse Group in Zurich. ``The inflation report was on the dovish side, retail sales weren't great, so it's understandable we see markets pricing in rate cuts, even before Christmas.''

Against the euro, the pound fell to 71.71 pence, the lowest since June 2003, before trading at 71.45 pence by 5:30 p.m. in London, little changed from yesterday. It slid 1.9 percent on the week, the biggest drop since July 2005.

The U.K. currency also weakened the most versus the dollar since August this week, sliding 1.9 percent to $2.0505. That's up from $2.0451 yesterday.

The latest industry and government reports show signs the housing-market boom has fizzled out and consumers are reining-in spending as interest rates at a six-year high curb demand.

Average U.K. house prices will be unchanged in 2008, compared with the most recent annual gain of 9.7 percent, Nationwide Building Society said today.

Government figures meanwhile showed retail sales fell for the first time in nine months in October, dropping 0.1 percent, as shoppers bought less food and clothing.

Spread Widens

The spread, or difference in yields, between two- and 10- year gilts widened 11 basis points since Nov. 9 to 12 basis points today as risk-averse investors sought the safety of shorter-dated paper.

Gilts advanced this week, with two-year yields dropping 22 basis points to 4.51 percent, a 9 basis-point drop on the day. The 10-year gilt yield slid 10 basis points this week and 4 basis points today to 4.64 percent.

Assuming a reduction in borrowing costs next year, inflation will slow to its 2 percent target by 2009, according to the Bank of England's quarterly inflation report published Nov. 14.

Consumer prices increased 2.1 percent last month. Turmoil in financial markets ``poses the biggest downside risk'' to Europe's second-largest economy, the bank said.