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By Jennifer Yousfi
London stocks plunged yesterday (Monday) following Wall Street's lead from Friday. The sell-off crossed all industries with only a handful of stocks in the FTSE 100 Index showing gains for the day as the index fell 1.9% for the day.
After U.S. Consumer Price Index data was released on Friday, investors around the world worried that stronger-than-expected inflation would be a drag on the U.S. economy, and keep the Federal Reserve from making any further rate cuts.
"When we look at economies around the world which are exposed to similar problems as in the U.S., the U.K. is pretty high on our list," Andrew Balls, a global bond fund manager at Newport, California-based Pacific Investment Management Co. () told Bloomberg News.
The United Kingdom seems poised to follow the United States' lead on more than just stock prices. Like the Fed, the Bank of England had to cut rates at its last meeting.
On Dec. 6, the Bank of England cut interest rates by 25 basis points in response to troubled domestic credit markets and a weakening housing market, as U.K. home prices fell for the third straight month in November. Despite the cut, the spread between the Bank of England's target rate and banks' overnight lending rates remains wide, as financial institutions remain wary of lending to one another.
And as in the United States, the rate cut had an adverse effect on currency. The British pound, which had enjoyed a historic high of $2.1161 just last month, has fallen to $2.0168 since the cut. Although the pound is still strong against the weak dollar, it has been losing ground to most of the other 16 actively traded world currencies, including the euro and yen.
In fact, the pound "will be the standout underperformer next year," Ian Stannard, a senior currency strategist at BNP Paribas SA (BNP) in London told Bloomberg News.
He expects sterling to fall as low as $1.83.
"The housing market looks as if it is falling off a cliff. Sterling is now going to fall quite sharply," he said.
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