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Pound plunges against euro as economy falters

THE pound tumbled to its weakest level against the euro in nearly 14 months yesterday amid UK economic weakness and heightened expectations of further monetary policy easing from the Bank of England.

At 5pm in London, the euro was up 0.66p on its pre-weekend level at 85.85p.

Sterling also tumbled further against the dollar yesterday, hitting its worst levels against the greenback since last August. The pound was trading at $1.5684 at 5pm, down 1.14 cents on its Friday night level.

And the pound hit its lowest level for more than 10 months on its trade-weighted index against a basket of currencies.

The euro has climbed sharply against the pound from levels below 78p last summer. It started this year around 81p.

Sterling's sharp falls against the single currency and the dollar in recent months have made eurozone destinations and the US significantly more expensive for people in Scotland, and elsewhere in the UK, who are travelling to these countries.

However, the pound's fall will provide some support to a manufacturing sector in Scotland and elsewhere in the UK which has been going through increasingly tough times. A weaker pound boosts the relative competitiveness of UK manufacturers in overseas market-places.

Figures published by the Office for National Statistics (ONS) on Friday showed that UK manufacturing output fell by 1.5% quarter-on-quarter in the final three months of last year. This played a part in a bigger-than-forecast 0.3% fall in overall gross domestic product in the fourth quarter.

Sterling fell sharply on Friday, after publication of the GDP data.

If the UK suffers a further fall in GDP in the opening three months of this year, it will be in triple-dip recession. The UK economy, in the grip of austerity, has proved much weaker than the Conservative-Liberal Democrat Government had projected.

Ross Walker, UK economist at Royal Bank of Scotland, said yesterday of sterling's continued slide: "We have had a sort of 'sell sterling' call for a while and it took a while to materialise. What we have seen today is a continuation of the trend this year. It has been a big move this year."

He cited a general "risk-on" backdrop, highlighting the rally in equity markets.

Mr Walker also noted greater confidence in the European Central Bank's policy response.

He cited speculation about changes to the UK's monetary policy approach, which has been fuelled by comments from incoming Bank of England Governor Mark Carney. Mr Carney, who heads the Bank of Canada and will take up his new post on July 1, voiced his belief at the World Economic Forum in Davos in Switzerland that monetary policy was not "maxed out" in major economies.

While believing that any shift in the UK monetary policy regime would not be as radical as some were suggesting, Mr Walker said: "It is still signalling the risks are (that) we see a looser monetary policy in the remainder of this year than we would otherwise have had."

Mr Walker also cited reduced risks of "contagion" from the eurozone debt crisis to the European banking system.

He said of the impact on sterling of Friday's GDP figures: "It wouldn't have helped, and the write-up around the Q4 data was obviously quite negative because the headline number was worse."

Mr Walker believed the weak GDP numbers would have had some influence on sterling's fall yesterday but mainly because they went with the general grain of the sterling sell-off.

Ned Rumpeltin, currency strategist at banking group Standard Chartered, said: "The UK economy is in shambles and, with a new central bank governor looking like turning on the tap to support growth, we expect the pound to underperform, both against the dollar and on a trade-weighted basis."

He asked: "Given higher inflation and lack of growth, who would want to buy the currency?"

ONS figures published this month showed annual UK consumer prices index inflation stood at 2.7% in December.

UK base rates have been at a record low of 0.5% since March 2009. And the Bank of England's Monetary Policy Committee, in its attempt to prevent annual CPI inflation undershooting the 2% target set by the Treasury on a medium-term view, has put in place a £375 billion quantitative easing programme.

QE is aimed at stimulating activity by boosting money supply through the purchase of Government and corporate bonds, funded by the issuance of central bank reserves.

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