Pound on downhill slide after peaks

STERLING has slammed into reverse gear on foreign exchanges and is expected to keep sliding for the remainder of the year.

After powering to an 11-year high of $1.9140 in the spring, it has performed a spectacular U-turn amid mounting evidence that the housing boom is over and a growing perception that interest rates are at or near their peak.

The pound shed nearly 3% on its trade-weighted index in August, its biggest one-month fall in more than a year. Against the dollar, it has skidded to a three-month low of about $1.77. Against the euro, it has plumbed six-month troughs beyond 68p.

A poll of economists by research house IDEAglobal found sterling is expected to drop to $1.75 by the year-end and $1.70 by the end of the first quarter of next year.

'We've seen from the surveys that the housing market has ground to a halt and lots of people are scaling back their growth forecasts for the economy,' said one trader. 'The market was long of sterling but the mood has shifted and suddenly everyone's running for the door.'

Mortgage provider Halifax last week gave the clearest signal yet that the long-running housing boom has finally hit the buffers, reporting a 0.6% decline in prices in August - the first fall in two years.

Other areas of the economy are also showing weakness. Atrocious weather and higher rates made August a washout for retailers while manufacturing in July suffered its first back-to-back decline since October 2002.

All this means that interest rate expectations have shifted dramatically in just a few months. In June, futures markets were pricing in rates as high as 5.75%. Now economists reckon there may be just one more quarter-point rise in the pipeline.

Some believe that, at 4.75%, rates have already peaked.

Interest rates are crucial for currencies. When they rise, they support a currency by making returns on deposits more attractive to foreign investors. While Britain's rate cycle is coming to an end, those of the US and the eurozone are just beginning. Sterling has been caught in the crossfire.

However, Chris Furness, currency analyst at 4CAST, said corporate deals could help underpin the pound. 'Merger and acquisition activity potentially looks good news for sterling, so we could see a turnaround in its fortunes over the next few weeks,' he said.