Dec. 17 (Bloomberg) -- Just a month after rising to a 26- year high against the dollar, the British pound is starting to look more like the beleaguered U.S. currency.

The pound weakened against 10 of the world's 16 most actively traded currencies since reaching $2.1161 on Nov. 9. In the U.K., just as in the U.S., policy makers are cutting interest rates to restore calm in credit markets and home prices are declining.

``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,'' said Andrew Balls, a global bond fund manager at Newport, California-based Pacific Investment Management Co., which oversees $721 billion. ``Sterling is a good currency to sell.''

The pound depreciated 3.3 percent to $2.0174 after reaching the highest level since May 1981 and fell for a third straight week. It weakened 11 percent versus the Canadian dollar this year and 5.4 percent against the euro. The dollar lost 7.8 percent this year on a trade-weighted basis against a basket of six currencies that make up the Fed's U.S. Dollar Index. It reached a record low in November.

Strategists say there's more pain in store for the pound. Zurich-based UBS AG and Frankfurt-based Deutsche Bank AG, the world's biggest foreign-exchange traders, predict the currency will weaken at least 6 percent against the dollar in 2008. Pimco, a unit of Munich-based insurer Allianz SE, New York-based Merrill Lynch & Co. and Goldman Sachs Group Inc. say sterling may be overvalued by as much as 25 percent, based on the level of trading done between the U.K. and the U.S., and prices for the same goods in the countries.

Housing Prices

The Bank of England cut its benchmark rate by a quarter percentage point to 5.5 percent on Dec. 6, as the U.K. confronts the contagion to housing markets that forced the U.S. Federal Reserve to reduce borrowing costs three times since September.

The difference between the London interbank offered rate that banks charge each other for three-month loans and the central bank's target is hovering near the widest this decade, a sign that financial institutions remain skittish about lending to each other.

In the U.K., house prices fell for a third consecutive month in November, the longest slump since 1995, HBOS Plc, the U.K.'s biggest mortgage lender, said Dec. 5. Values, which tripled since 1997, may decline as much as 10 percent in 2008, according to David Miles, an economist at Morgan Stanley in New York. Median home prices declined in the U.S. this year, the first annual drop since the Great Depression, according to forecasts from the National Association of Realtors in Washington.

`Standout Underperformer'

The U.K. economy will expand 2 percent next year, down from 3.1 percent in 2007, according to the median estimate of 15 economists surveyed by Bloomberg. A separate survey showed growth in the U.S. will increase to 2.3 percent in 2008 from 2.2 percent this year.

The pound ``will be the standout underperformer next year,'' said Ian Stannard, a senior currency strategist at BNP Paribas SA in London who expects sterling to fall to $1.83. ``The housing market looks as if it is falling off a cliff. Sterling is now going to fall quite sharply.''

The U.K.'s currency will drop to $1.94 by the end of next year, according to the median estimate of 42 firms surveyed by Bloomberg. Goldman Sachs and Royal Bank of Scotland Group Plc in Edinburgh say selling the pound versus Japan's yen is one of their top 10 recommendations for 2008.

Pimco's Trades

Pimco set up trades last month to profit from a decline in the pound against Asian currencies such as the Korean won and the Singapore dollar, Balls said. Singapore's currency rose 3.69 percent against sterling in the past three months and the won dropped 0.59 percent.

Futures show traders expect the Bank of England will lower its target rate to 5 percent by the end of 2008, while Pimco and Zurich-based UBS say it will drop to at least 4.5 percent. The Fed will cut U.S. rates a quarter point to 4 percent during the same period, according to the median estimate of economists surveyed by Bloomberg on Dec. 11.

Lower rates may make U.K. financial assets less attractive to international investors, putting more pressure on the pound.

``We have seen our clients covering or actually exiting their long positions on the pound,'' said Alina Anishchanka, a currency strategist at UBS in London. ``The pound will definitely suffer.''

Risk Reversal

The difference between two-month pound calls, which provide the right to buy the currency, and puts, which allow for sales, fell to minus 1.3 percentage points on Dec. 13. The so-called risk reversal rate, used as an indicator of sentiment in the foreign-exchange market, shows traders are more bearish on sterling than at any time since October 2003, data compiled by Bloomberg show.

Some traders say the pound rally will resume. Faster inflation and economic growth may keep the Bank of England from lowering borrowing costs as fast as the Fed. U.K. rates are the highest among the Group of Seven nations. The economy has expanded for 61 straight quarters.

``I'm a little surprised about all the negative calls on the pound because, in many ways, the support from the U.K. economy is still there,'' said Dale Thomas, head of currencies at Insight Investment Management in London, which oversees about $121 billion. ``I'm long the pound against the dollar.''

`Rather Uncomfortable'

The U.K. unemployment rate fell to its lowest since 1975 in November, government figures show. The falling pound may prompt faster inflation by increasing import costs, weakening the case for further rate cuts. The pace of consumer price increases in October exceeded the Bank of England's 2 percent target for the first time in four months.

Bank of England Governor Mervyn King, wary of how much longer the labor market will hold up, called the short-term outlook ``rather uncomfortable,'' in comments to Parliament's Treasury Select Committee in London Nov. 29.

U.K. financial institutions have been caught in the fallout from record defaults among subprime borrowers, writing down more than 3.7 billion pounds ($7.5 billion) this quarter. In September, Newcastle-based Northern Rock Plc had to be bailed out by the Bank of England after it was unable to raise debt financing.

David Woo, head of currency strategy in London at Barclays Capital Inc., part of Barclays Plc, predicted the pound will be among the worst-performers next year because of the housing turmoil and its fallout on consumers.

Mortgage Costs

Mortgage-interest costs consumed 20.6 percent of first-time buyers' incomes in October, the most since 1991, according to London-based Council of Mortgage Lenders. Consumer confidence fell to the lowest since at least 2004 last month, according to a Dec. 5 report compiled by Nationwide Building Society, Britain's fourth-biggest mortgage lender.

``Mortgage debt as a share of disposable income is even higher in the U.K. than in the U.S. and the country has an even more over-valued housing market,'' Woo said. ``The twin pillars of the U.K. economy, housing and banking, are coming under further pressure.''

To contact the reporters on this story: Bo Nielsen in New York at bnielsen4@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net

Last Updated: December 17, 2007 13:05 EST