Overvalued pound to fall 20% as Darling despairs

London: 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 per cent too strong against the dollar, even after falling more than 10 per cent 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 UK 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 big-gest slowdown since World War II.

The Bank of England (BoE) kept interest rates unchanged for a fifth month last week to curb inflation that accelerated to 4.4 per cent 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 per cent, 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 per cent 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 fell to $1.7649 as of 11:03am in London.

In the past two decades, the five major sell-offs in the pound averaged about 22 per cent from peak to trough against the dollar, according to Bloomberg calculations. Since reaching a 26-year high of $2.1161 on November 9, the currency depreciated 16.5 per cent.

The pound's battering continued last week, after Darling, in an August 30 interview with the Guardian newspaper, said Britain faces "arguably the worst" slump in more than 60 years.

While Darling said the next day his comments had been misinterpreted, and that he had been referring to the global economy, Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, took him at his word.