Pound hits lowest in over 2 years

By Jamie McGeever

LONDON (Reuters) - The pound sank on Friday to its lowest level against the dollar in over two years, on a growing conviction that the economy is stagnating and that the dollar's seven-year downtrend may finally be ending.

Sterling rose against the euro -- which is being hammered by similarly gloomy growth prospects for the euro zone -- thereby helping trade-weighted sterling to rebound from the 11-1/2 year low plumbed on Thursday.

But it was sterling's anaemic performance versus the dollar that stood out again, two days after the Bank of England's quarterly inflation report surprised markets with a pessimistic view on the economy and a dovish view on interest rates.

"Cable" chalked up its 11th straight daily decline, according to Reuters data, and technical support at the 200-week moving average at $1.9020 was well and truly smashed. Sterling closed below that key level for the first time since mid-2002.

It's not hard to see why sterling is under pressure: rising unemployment, slowing wage growth, falling house prices, large trade and budget deficits, and slowing economic growth.

"With this backdrop, sterling remains vulnerable, especially against the dollar," wrote Michael Saunders, chief European economist at Citigroup, in a weekly research note.

"Over the period 1993-2002, sterling/dollar averaged $1.55, versus an average of $1.84 since then. As the UK economy stumbles, we expect to return to $1.55 or so over the next 12-18 months."

At 3:30 p.m. the pound was down 0.3 percent on the day at $1.8625 GBP=, having traded as low as $1.8514 earlier in the day, a low not seen since July 2006.