FOCUS: Pound Nears Euro Parity, Exporters Wait To Benefit

LONDON --The battered pound has fallen ever closer to parity against the euro in recent days, denting the pride of Britain's businesses, but offering hope for U.K. companies that sell products or services overseas.

However, analysts are warning that plunging worldwide demand may offset the competitive advantage from sliding sterling and scupper policymakers' hopes for an export-driven recovery.

After a decade riding high, increasingly grim economic data and rapidly falling interest rates have sent sterling tumbling to record lows against the euro in recent days, making the country's exports much cheaper.

The euro has risen 25% against the pound in the last three months as data suggested the U.K. economy is headed for a deeper recession than previously thought.

The euro was trading at GBP0.9760 Tuesday afternoon, up from GBP0.7824 late October and GBP0.7484 at the start of 2008.

The pound, something akin to a high-yield currency last year when the Bank of England's benchmark rate stood at 5.75%, is no longer so. Policymakers have slashed 300 basis points off the benchmark rate since October, reducing it to 2.0%. The European Central Bank has eased policy more gradually and its refinance rate now stands at 2.5%.

In normal times, a precipitous fall in sterling would give U.K. exporters an edge. That's what happened when the pound exited the European Exchange Rate Mechanism - the precursor to the euro - in 1992, helping spark a decade and a half of growth.

But with the global economy suffering and the euro zone now officially in recession, the weaker pound has not boosted trade.

According to the most recent trade data from the Office for National Statistics, total goods exports fell 1.7% in the three months to October compared to the previous quarter. Exports to euro-zone countries dropped 0.4% in the same period. The euro zone is the U.K.'s biggest trade partner.

December's Confederation of British Industry's industrial trends survey sends the same message. With manufacturing output declining for eight straight months, 45% of exporters told the CBI their order books were below normal, versus 12% of manufacturers who said the opposite. That was the most negative balance the survey had shown in five years. "The further depreciation of sterling does add to the U.K.'s export competitivity. However, the gains in export growth are likely to be fairly limited, since the euro-zone economy is also contracting in the midst of this very serious global downturn," said Lai Co, head of economic analysis at the CBI.

Some believe the pound's slide against the euro may be nearing its end.

Hans Redeker, head of global foreign exchange at BNP Paribas in London, said the euro has been helped by European banks repatriating funds ahead of year-end. He believes that the bad news hitting the euro-zone economies will move to the fore in the coming months and that after peaking in the next few weeks, the euro will slip to GBP0.84 by the end of 2009.

However, with most economists expecting the Bank of England to continue aggressively slashing rates, others see more scope for sterling declines.

"Interest rate expectations continue to decline and forecasts are that the BoE will cut rates by another 50 basis point at their next policy meeting," wrote Terri Belkas, currency strategist for DailyFX.com. "Therefore, the central bank may be on a course for a zero interest rate policy which will lead to further pound weakness."

For the U.K.'s dwindling band of euro enthusiasts, the volatility of sterling this year has raised hopes the government will think more seriously about signing up to the single currency soon. E.U. Commission President Jose Manuel Barroso claimed recently this month that the U.K. was "closer than ever" to joining.

Yet Prime Minister Gordon Brown's officials have quashed such talk and political analysts note that even if the politicians were keener, public opinion remains dead set against.

Sterling weakness is, nevertheless, a problem for Brown. The prime minister has adopted an aggressive approach to the downturn and called on others to do likewise.

Last month, the U.K. unveiled a GBP20 billion fiscal stimulus package, which Brown insisted the country can afford. That's despite the U.K. treasury predicting net debt will soar above GBP1 trillion, or nearly 60% of gross domestic product, over the next few years.

The opposition Conservative party has called that irresponsible and warned that investors' worries about the U.K.'s finances could lead to a run on the pound.

While the pound's fall hasn't reached that stage, it's dropped far enough for the Conservative's economics spokesman, George Osborne, to make political capital out of the declines.

"As Gordon Brown himself says, a weak currency is a reflection of a weak economy and a weak government. Labour is bankrupting Britain again and the rest of the world knows it," Osborne said Monday.

-By Laurence Norman, Dow Jones Newswires; 44-207-842-9270; laurence.norman@dowjones.com