The British pound slumped by nearly five US cents at one point to its lowest level in just over five years after Bank of England governor Mervyn King hinted at further interest rate cuts to come and warned that the British economy is now likely in recession. The pound fell as low as $1.6201 in early London trading Wednesday, from around $1.675 before the speech - a drop of nearly 3 percent - before recovering somewhat and trading just above $1.64. The last time the pound traded lower was on Sept. 19, 2003, when it stood at 1.6139. As recently as July, the pound was trading above $2 before lower British interest rate expectations fueled the sharp decline. The pound is not the only currency in retreat against the dollar. The euro has slumped from over $1.60 in July to Wednesday's two-year low below $1.29 as markets price in growing expectations of lower interest rates from the European Central Bank, as the 15-nation single currency zone exhibits more and more signs of a deep recession. Both the pound and the euro are retreating because lower central bank interest rates can weaken a country's currency, as investors take their money elsewhere in search of higher yield. Medium-term inflation risks had “shifted decisively” to the downside.
