Currencies

The pound is expected to decline on signs that the economy is slowing enough to prompt the Bank of England to lower interest rates soon, diminishing the allure of pound deposits.

Sterling was little changed last week versus the euro, which declined 0.25 per cent to 0.7000 to the pound. It was at $1.6533 on Friday. Still, the euro could rise as high as 0.7250 to the pound over the next few days, said Richard Passow, at Barclays Capital in Frankfurt.

The case for an imminent rate cut was bolstered after a report showed that in the final quarter of last year, the economy grew at its slowest pace since 1992, up just 0.2 per cent from the third quarter.

"This deflates any expectations that the economy is falling out of bed," said Cameron Crise, currency strategist at Warburg Dillon Read. Still, it "won't dissuade the central bank from trimming" its benchmark rate, currently at 6.0 per cent.

The Bank of England reduced lending rates for the fourth consecutive month in January. It may cut again as early as February, said Mr Crise.

A survey on industrial trends by the CBI is due for release on Tuesday. Last month's survey showed that total demand, exports and expectations about output all improved among manufacturers in December. "If we get something awful, that will suggest the slowdown has further to go," said Mr Crise.

Expectations for a rate cut were boosted earlier last week after a report showed that retail sales fell 0.9 per cent last month amid tepid consumer demand. "I see room for lower interest rates," said Mr Passow. "Growth should come down" and the pound could decline, he said.

The pound could get support, though, as traders flock to it as a haven from currency turmoil in other parts of the world.

Many traders speculated that China would devalue its currency, the yuan, to keep its exports competitive in the face of recent devaluations in other emerging market currencies. "We've had a devaluation in Russia and Brazil, and the third piece of the puzzle is China," said Hugh Walsh, a trader at Commerzbank in New York.

The pound is also likely to get support against the euro on speculation that European economies are slowing enough to prompt the European Central Bank to lower its benchmark rate before long. The pound will "do quite well against the euro because although the UK is slowing, everybody had expected that and their eyes are on continental Europe, which is performing much worse than expected," said Glenn Davies, chief economist at Credit Lyonnais Securities.

The German economy may have contracted in the last quarter of 1998 for the first time in three years, and may shrink again this quarter, as a rise in domestic demand has failed to offset a slump in exports to South- east Asia and Russia, the country's finance ministry said on Thursday.

That followed a report by the Bundesbank that said the German economy "markedly lost momentum" at the end of last year, and a report by the Munich-based Ifo Institute indicating that west German business confidence fell in December to its lowest level since December 1996.

Those signs bode ill for the euro because Germany is the largest of the 11 nations that adopted the single currency this year.