Sterling dropped below $2 for the first time in three months on Wednesday after the minutes of the Bank of England’s December meeting revealed a unanimous decision to cut interest rates.
All nine members of the central bank’s monetary policy committee voted to lower UK rates by 25 basis points to 5.5 per cent, confounding expectations that three members might have voted for no change in monetary policy.
Analysts said the unanimous decision and the general tone of the minutes indicated that another interest rate cut early in 2008 was on the cards.
“The dovishness does suggest that a January rate cut is a growing threat,” said James Knightley at ING Financial Markets.
Sterling’s woes were compounded later in the session as a downbeat survey from the Confederation of British Industry supported anecdotal evidence that the UK retail sector was set for a tough Christmas period.
Simon Smollett at Calyon said there were signs from the options market that sterling would continue to fall.
He said the difference between the price of insuring against a sharp drop in sterling, compared with the cost of insuring against a sharp rise, had been climbing steadily since August and this week had hit its highest level since 1992.
“It would seem that the pressure is still building and may hint that sterling/dollar will finish the year below $2,” said Mr Smollett.
The pound, which was last below $2 against the dollar on September 20, fell 0.9 per cent to $1.9967 in late trade in New York. Sterling also fell 0.8 per cent to Y226.43 against the yen and declined 0.4 per cent to £0.7180 against the euro.
The euro lost ground elsewhere, however, after the Ifo index of German business confidence dropped to its lowest level in almost two years in December.
Stuart Bennett at Calyon said that although the drop in the Ifo suggested slower growth in the eurozone next year, the index remained well above its long-term average, signalling no reason to panic.
He said there was little chance of an imminent cut in eurozone interest rates since European Central Bank officials had painted themselves into a corner on interest rates by sounding hawkish on inflation.
This stance was reiterated by Jean-Claude Trichet, ECB president, who said in a testimony before the European parliament on Wednesday the eurozone faced a “more protracted” period of inflation than previously expected.
“Our view is that the ECB will stay on hold throughout 2008 unless the global credit crisis is seen to have a much greater impact on growth,” said Mr Bennett.
The euro fell 0.5 per cent to $1.4340 against the dollar and dropped 0.4 per cent to Y162.60 against the yen.
The yen was little changed at Y113.40 against the dollar.
