You wouldn't suspect it listening to the many English accents in New York's Bloomingdale's department store or across the street at the Levi's and Banana Republic shops, but the air has begun to leak from one of the world's biggest financial bubbles: the pound sterling.

Britain's currency soared 55 percent from mid-June 2001 to a 26-year high of $2.1161 last November. In the 10 weeks since then, though, it has fallen 6.3 percent against the dollar, 6.4 percent against the euro and 11 percent versus the yen. On Jan. 15, it fell to a record 76.14 pence per euro and a day later dropped to 207.02 yen, its lowest since May 2006.

Not only is the pound weakening, it's going the way of the dollar for many of the same reasons that have plagued the U.S. currency: a deflating housing bubble, a large trade deficit and the prospect of lower interest rates. Both the U.K. and U.S. also have financial industries reeling from the subprime-mortgage crisis and related credit crunch that augur the probability of large layoffs. All of these suggest sterling has further to fall.

Think exchange rates are just for geeks? From sterling's 2001 lows against the dollar to its November 2007 highs, the U.K. stock market rose only 9.3 percent, according to Morgan Stanley Capital International. But for a U.S. investor, who tallies wins and losses in dollars, the market rallied 66 percent. And for a Japanese investor, the increase in yen terms was 51 percent.

It also works in reverse: A falling pound detracts from a non-Briton's U.K. returns.

Housing Decline

The long-anticipated crisis in Britain's housing market is beginning to unfold, and its full force won't be felt for months. Home prices, after tripling during the past decade and doubling in the past six years, declined in the fourth quarter of 2007 for the first time since 2000. U.K. homebuilders' shares, in a precursor of the bad news to come, have fallen more than 50 percent from their peaks. And real-estate company stocks are more than 40 percent off year-ago levels.

``It will take time before homeowners panic over a diminishing wealth effect brought on by negative house-price growth,'' says David Abramson, Montreal-based chief currency strategist at BCA Research Ltd. ``But confidence will fall as it becomes apparent that the Bank of England has fallen behind the curve due to perceived upside risks to inflation.''

The folks on the hot seats are Bank of England Governor Mervyn King and fellow members of the bank's Monetary Policy Committee. Last month, they lowered the base rate for the first time in more than two years, to 5.50 percent from 5.75 percent. By year's end, the rate should be reduced further to 4.75 percent, according to the median forecast of 29 analysts surveyed by Bloomberg News on Jan. 4. Some gurus even see rates eventually falling to 4 percent.

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