Currencies

The British pound fell more than three pfennigs to a two-month low against the deutschmark after a survey showing a manufacturing slump boosted expectations official UK interest rates won't rise.

The Chartered Institute of Purchasing and Supply index fell to 49.5 in April from 51.5 in March, with a number less than 50 showing the industry contracted. That follows a trade report earlier in the week showing the worst deficit in eight years, as the pound's year-and-a-half-long advance hits UK exports.

Economists said the more the pound hurts manufacturing, the more likely overall economic growth will begin to suffer. That means Bank of England policy makers aren't likely to raise interest rates again, and if rates don't rise neither does the money-market return on sterling deposits.

"On the back of the recessionary data in manufacturing this week, fund managers are making a strategic move out of sterling," said Stephen Hannah, director of research at IBJ International, who sees sterling falling to 2.8 marks by the end of the year. "There's virtually no chance of a rate hike" when the central bank's two-day meeting ends at midday on Thursday. The pound fell as low as 2.9585 marks, its lowest since 24 February.

The institute blamed the decline on the pound's gains of as much as 30 per cent since mid-1996 against Britain's main trading partners, which has made UK goods more expensive abroad.

The pound was also largely responsible for the bigger UK trade deficit. A report on Tuesday showed the global trade deficit expanded to pounds 2.2bn in February, the biggest since March 1990, up from pounds 1.1bn in January.

"All of the evidence in the [manufacturing] industry is now gloomy and recession in the sector is inevitable," said Jonathan Loynes, a UK economist at HSBC Markets. "The deeper the downturn in industry, the greater the chances of overall recession."