'Overvalued' Pound to Fall 20% as Darling Despairs

Lukanyo Mnyanda and Bo Nielsen
Bloomberg
Monday, Sept 8, 2008

Currency traders are starting to take the British government at its word, putting the tumbling pound on course for the worst year since 1992.

The pound is about 20 percent too strong against the dollar, even after falling more than 10 percent this year, according to New York-based International Foreign Exchange Concepts Inc., the world's biggest currency hedge-fund company. Futures traders became more bearish on the U.K. currency than at any time in the past 16 years.

The steepest housing slump in 18 years prompted Chancellor of the Exchequer Alistair Darling to tell Britons they face the biggest slowdown since World War II. The Bank of England kept interest rates unchanged for a fifth month last week to curb inflation that accelerated to 4.4 percent in July, more than twice the central bank's target. During the two previous times the economy cooled since 1997, the pound fell as much as 19 percent, according to data compiled by Bloomberg.

The pound may be ``massively overvalued against the dollar,'' said John Taylor, who oversees $14.6 billion as chief executive officer of FX Concepts in New York. ``They're going to have to go for a cut. I don't know who they think they're kidding by holding out.''

Most Since Soros

The pound's 11 percent slide this year has taken investors and strategists by surprise. The currency ended last week at $1.7661, below the year-end median forecast of $1.85 by 35 firms surveyed by Bloomberg. The last time it fell this much in a year was 16 years ago, when George Soros earned more than $1 billion speculating against the currency and the economy was emerging from its last recession. The pound rose to $1.7830 as of 7:45 a.m. in London today.

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