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Pound hits new low against euro as parity looms

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JANE WARDELL | December 12, 2008 11:40 AM EST | AP

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LONDON — The British pound edged closer toward parity with the euro on Friday, hitting a record low for the fifth consecutive day on expectations of a deep and prolonged recession.

The pound has slumped around 25 percent against the common European currency this year _ touching euro1.118 Friday _ after hefty interest rate cuts by the Bank of England and analysts say it could reach parity within weeks, making life tougher for British tourists abroad.

"It's looking like it's going to hit parity in the first quarter of next year," said Mark Deans, a dealer at Moneycorp in London.

Exporters, who usually benefit from a lower currency, are also struggling amid weaker demand in Britain's major export markets in the United States and Europe.

The pound hit euro1.118 on Friday, the weakest rate since the euro was launched in 1999, and the rate for British travelers closed the gap still further, with some exchange bureaus offering euro1.07.

Analysts said the relentless negative economic news on sectors from retail to housing, along with predictions that interest rates could hit zero percent, meant the pound was likely to continue to fall in the coming weeks.

Mark O'Sullivan, director of trading at Currencies Direct, said that sterling could even fall below parity if there was a "complete loss of confidence in UK PLC."

"For any investor or government there is no reason to be holding sterling at the moment," O'Sullivan said. "With currency markets there is no rhyme or reason. It is worrying."

The pound has fallen against the euro 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 _ a move that can weaken demand for a country's currency by reducing the yield on interest-bearing investments.

The Bank of England is expected to cut rates further as the British economy, which shrank 0.5 percent in the third quarter, appears headed into a prolonged recession.

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

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.

The weaker currency should be a boost for British exporters, but the economic woes of the country's largest export markets in the United States and Europe are curbing demand for products, negating some of those positive effects.

"Our export competitiveness is increasing but many of our key export markets are contracting rapidly," said Ian McCafferty, the chief economic adviser to the Confederation of British Industry, Britain's leading employers' organization.

Some 45 percent of exporters reported falls in orders in a recent survey, according to the industry group.

The pound was also lower against the U.S. dollar on Friday, at $1.4950, down from $1.4978.