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Pound's flirtation with euro parity hits tourists

AP  Dec 30, 2008

LONDON — British tourists going to continental Europe to celebrate the New Year were getting fewer euros for their pounds on Tuesday than at any time since the common European currency's 1999 launch.

The pound's relentless fall showed no sign of letting up and currency analysts said it was only a matter of time before the official exchange rate hits one pound per euro.

Officially, a pound was still worth slightly more than a euro on Tuesday, hovering at a near-record low of euro1.0240 after sustaining falls of 13 percent against the euro this month alone.

But many tourists changing their money to go on vacation were already getting less than a pound for each euro, as exchange booth rates are usually slightly lower than rates on financial markets.

Britain's Post Office, for instance, was offering just euro98.04 for 100 pounds — levels that are prompting some British newspapers to label the pound's plunge a "currency crisis."

"In past decades a currency crisis on this scale would have threatened governments," said the Daily Mail. "Across the Irish Sea, the sickly pound has led to a stampede of shoppers heading across the border for bargain buys."

Currency analysts say the market exchange rate will hit parity early in the new year, as Britain's economic gloom pushes the Bank of England to cut interest rates even more than it already has to stimulate the economy. Lower rates can weaken demand for a country's currency by reducing the yield on interest-bearing investments.

"The sentiment around sterling at the moment is unrelentingly negative," said Glenn Uniacke, a London-based currency specialist at Moneycorp. "There's no reason to believe we won't hit parity within weeks."

Britain's economy shrank by 0.6 percent in the third quarter, and looks like it is heading into a serious recession.

"Recent price behavior gives little reason to believe that parity won't be found in the near term," said James Hughes, a currency analyst with CMC Markets in London, who is predicting that the Bank of England will slash the base interest rate by as much as a 1 percentage point by February.

The pound has already fallen by more than 25 percent against the euro this year — hitting an all-time low of euro1.0205 on Monday — as the Bank of England has lowered interest rates from a peak of 5.75 percent to a more than 50-year low of 2 percent.

Interest rates in the euro zone remain higher at 2.5 percent, despite a 0.75 percent cut by the European Central Bank earlier this month.

The lower pound raises costs for Britons when they travel to the 15 countries that use the euro, and raises the price of imported goods.

Exporters, who usually benefit from a lower currency, are not getting much help from the pound's decline because the global economic slowdown is leading to weaker consumer demand in Britain's major export markets of the United States and Europe.

The pound was little changed against the U.S. dollar on Tuesday at $1.4500. At this time last year, 1 pound would buy more than $2.

Pound's flirtation with euro parity hits tourists
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