Jan. 21 (Bloomberg) -- Investors should keep betting the British pound and gilts will rise because the country’s economic slump is being overplayed, according to Goldman Sachs Group Inc.

“We’re bullish the pound and gilts,” Thomas Stolper, a Goldman Sachs economist in London, said today in an interview. “The macro picture in the U.K. is not as poor as many people try to portray.”

The British currency fell to the lowest level since 2001 versus the dollar and dropped a fourth day against the euro after Bank of England Governor Mervyn King said he’s not opposed to sterling’s weakness as the lowest interest rates since 1694 fail to prevent the economy from shrinking. King also said officials may start buying assets to revive the economy.

The pound dropped 1.1 percent to 93.62 pence per euro as of 3:38 p.m. in London. It fell 1.1 percent to $1.3771. The pound will strengthen to less than 90 pence per euro and to more than $1.60 in as little as three months, Stolper said.

“The likelihood of a near-term improvement in business activity suggests sterling could bounce back quite quickly,” Stolper wrote in a report e-mailed earlier today. “We therefore stick to our guns and remain long sterling.”

Opposing Forecasts

Goldman Sachs’s forecast contrasts with that of some of the world’s leading currency traders. Royal Bank of Scotland Group Plc, the fifth-largest foreign-exchange trader, said today the pound is in a “perfect storm” and may weaken to $1.2913. Bank of Tokyo-Mitsubishi UFJ Ltd. said the U.K. currency may fall to $1.30 “sooner rather than later.”

U.K. banks are likely to lose no more than 90 billion pounds ($124 billion) of the 350 billion pounds in toxic assets weighing on the industry, Stolper said. That’s “substantially less” than some estimates and so little that the government debt guarantees might not be used, he said.

The 10-year gilt will probably rally to yield 3.2 percent by the end of this quarter, Stolper said. It was at 3.45 percent today.

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net

Last Updated: January 21, 2009 10:45 EST