Sterling at two-year low against dollar

Sterling slid below $1.50 against the dollar for the first time in more than two years after figures pointed to a sharp drop in British manufacturing activity, adding to fears the UK is on the verge of a triple-dip recession.

The pound fell more than 1 per cent to $1.4984, its weakest level against the dollar since July 2010, after a closely watched poll of purchasing managers in the UK manufacturing sector by Markit indicated activity unexpectedly contracted in February.

The data rekindled fears that growth would elude the economy in the first quarter and plunge the UK into a triple-dip recession after output fell in the final three months of 2012.

“The return to contraction of the manufacturing sector is a big surprise and represents a major setback to hopes that the UK economy can return to growth in the first quarter and may avoid a triple-dip recession,” said Chris Williamson, chief economist at Markit.

Sterling has already been battered this year on concerns about sluggish UK growth and growing expectations the Bank of England could seek to ease monetary policy again.

The pound has fallen 8 per cent against the dollar this year, helped by news that three out of the nine members of the Bank’s Monetary Policy Committee voted to do more quantitative easing last month. Members of the MPC have also signalled that a weaker pound would help the UK economy by boosting exports.

Michael Saunders, chief UK economist at Citigroup, said it was “touch and go” whether the UK would avoid a triple-dip recession. However, he added that weak economic growth would remain a problem for the UK economy regardless of whether the economy was expanding this quarter or not.

“Even if the economy grows in the first quarter, it will still be miserable,” he said. “Clearly, the MPC are talking the pound down at every opportunity. The UK needs to get export-led growth, and getting the pound down is probably a necessary precondition for that.”

The pound rose from a six-month low hit earlier this week against the euro as uncertainty over the outcome of the Italian elections helped the UK currency. The pound’s haven status has come under pressure this year as improved sentiment on the eurozone led investors to dump sterling-based assets. But the boost to the pound proved shortlived, and sterling fell against the single currency again Friday to trade close to its weakest level since October at €1.1563.

The purchasing managers’ index from Markit fell to 47.9 from 50.8 in January, its lowest level since October, confounding expectations of a modest increase to 51.