Forex - Northern Rock crisis continues to batter pound; FOMC meeting in focus

LONDON (Thomson Financial) - The consequences from the crisis at Northern Rock PLC continued to batter the pound, which dropped below 2 usd for the first time in several weeks and slumped to a fourteen month low against the pound.

Last week's news that Northern Rock had to seek emergency funding from the Bank of England has led to hoards of customers queuing to withdraw their savings outside branches. This is set to continue today and the company's share price has fallen by a further 30 pct this morning.

"Expect a very shaky start to the week for UK assets, with the pound looking particularly vulnerable in the near-term," said Audrey Childe-Freeman at CIBC Markets.

She also pointed to a weekend report that the Nationwide building society has warned that UK house price growth will halve next year as a result of the credit crunch. This comes after Rightmove's latest house price survey revealed a 2.6 pct monthly fall in house prices in September.

The pound has dropped below 2 dollars for the first time since August 29, while the euro hit a high of 0.6939 stg, its strongest level since July 2006.

The euro is benefiting from the contrasting outlooks for monetary policy in the euro zone and the UK. While the European Central Bank is expected at least to leave interest rates unchanged, short sterling futures are rapidly pricing in a Bank of England rate cut in the coming months.

"The net result of all this has been that euro/sterling has not only now broken out of the narrowing range that had defined trading since 2003 but is also accelerating rapidly. Indeed, last week's move was the largest weekly rally since November of 2005," said Simon Derrick at the Bank of New York Mellon.

Attention in the UK this week will centre on the release of the minutes to the BoE's Monetary Policy Committee meeting earlier this month and, more importantly, the grilling that BoE governor Mervyn King will face before the Treasury Select Committee on Thursday.

Meanwhile, the yen was broadly higher on increased risk aversion as worries over the extent to which the credit crunch will hit the global economy.

Elsewhere, however, the prime focus for currency markets will be on tomorrow's interest rate decision by the Federal Reserve Open Market Committee. Market expectations are that rates will be cut, possibly by 50 basis points rather than the usual 25.