Pound falls as Fitch warns on UK deficit

LONDON Tue Jun 8, 2010 12:55pm BST

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LONDON (Reuters) - Sterling fell broadly on Tuesday after Fitch ratings agency said the fiscal challenges facing the UK were "formidable," putting the issue of the UK's substantial budget deficit back in the spotlight.

Fitch said the UK needed to cut its deficit more quickly than the previous government set out in its April 2010 budget. It said Britain's public debt ratios had risen since 2008 more quickly than those of any other AAA-rated sovereign.

Analysts and traders said the comments reignited concerns about how the safety of the UK's rating and the cost of insuring British government debt against default rose in response.

However, Fitch acknowledged the new government, which took power last month, had acted quickly in calling for fiscal consolidation. Finance Minister George Osborne will present an emergency budget on June 22 as the government looks to cut a deficit running at around 11 percent of national output.

"The comments brought sterling and its associated woes rushing back to the fore of our attentions once again," said Richard Wiltshire, chief FX broker at ETX Capital.

"The Fitch announcement certainly accentuated the move lower in sterling, taking it down through $1.4400 and triggering stops of some nervy longs."

Sterling hit a nine-day low against the dollar of $1.4374 after the Fitch report. By 12:10 p.m., it had recovered to $1.4433, though it was still down 0.2 percent on the day.

The euro was up 0.4 percent at 82.66 pence, having hit a high for the day of 82.91 pence. Technical analysts said gains could be capped by resistance around 84.00 pence, the 2009 low.

The falls pushed sterling's trade-weighted index down 0.4 points from late trade on Monday to 80.4.

Wiltshire said the reaction to the Fitch comments proved how fickle markets were in the current volatile trading environment.

Sterling gained earlier in the day in a cautious welcome of the new coalition government's determination to tackle the UK's deficit, and on talk insurer Prudential still needed to buy back sterling following the collapse of its bid for AIG's Asian arm.

TACKLING THE DEFICIT

Prime Minister David Cameron told Britons on Monday the scale of the country's budget problems was even worse than he had anticipated and cited crisis-hit Greece as an example of the risk of failing to act.

Investors were wary, however, about the potential impact of large spending cuts on economic growth, while worries about euro zone debt problems left them minded to avoid buying riskier currencies, including sterling.

"The market is for the moment giving the new coalition the benefit of the doubt that it will come up with a satisfactory fiscal consolidation plan," said Lee Hardman, currency economist at BTMU.

"But if the global recovery starts to lose momentum people will be more worried about the growth impact."

A British Retail Consortium survey showed like-for-like retail sales rose 0.8 percent last month, although consumers were still reluctant to make major purchases.

A survey by recruitment company Manpower also showed the majority of UK employers expected to recruit more staff in the next three months, but the public sector's outlook was the weakest since 1994.

(Reporting by Jessica Mortimer)

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