November 20, 2009 / 4:26 PM / 10 years ago

Sterling falls sharply as debt concerns weigh

* Sterling falls on UK debt concerns, waning risk appetite

* Pound down more than 1 pct vs dlr, hits 2-wk low $1.6460

* Euro rises above 90 pence to 1-week high

By Jessica Mortimer

LONDON, Nov 20 (Reuters) - Sterling fell sharply on Friday, falling more than 1 percent to a two-week low against the dollar, on concerns over the UK’s fiscal health and waning investor appetite for perceived risky currencies.

The pound also fell to a one-week low against the euro and a basket of currencies as it slid further in the wake of data on Thursday showing UK public finances deteriorated almost twice as fast as expected last month. [ID:nLJ374958]

The moves were exacerbated as UK debt concerns coincided with falls in equities and commodities which encouraged traders to take profits on the recent rise in riskier currencies, including sterling, against the dollar and the yen.

The UK government faces mounting pressure to spell out how it will curb public borrowing as it prepares to fight an election due by June 2010, amid worries that record debt levels will threaten Britain’s triple-A sovereign debt rating.

“Ever since yesterday, sterling has been under pressure and it is clearly one of the weaker G10 currencies,” said Naeem Wahid, currency strategist at Lloyds Banking Group.

“It is likely that public finances data will be weak in the months to come, and each time we get that it will be negative for sterling”.

By 1543 GMT, sterling GBP=D4 was down 0.9 percent at $1.6505, having earlier fallen more than 1 percent to a two-week low of $1.6460.

It also fell sharply against the euro, which hit a one-week high of 90.13 pence per euro EURGBP=D4, and lost more than 1 percent against the yen GBPJPY=R to a low of 146.47 yen, its weakest since November 3. This helped push sterling’s trade-weighted index to a one-week low of 80.4 =GBP

Sterling has erased all of the gains made on Monday when it hit a three-month high just shy of $1.69.

These gains were largely a result of investors unwinding substantial bets that had built up on the pound falling, but broader negative sentiment towards the currency remains intact.


Concerns about mounting government debt and the belief that interest rates will stay very low for many months to come have ensured sterling has remained weak throughout this year, with only a few forays below the 85 pence per euro mark.

“The pressure on sterling will not abate. The Bank of England is in no rush to change its very loose monetary policy and sterling should stay weak against the euro,” Bank of New York Mellon currency strategist Neil Mellor said.

Rating agencies have warned the UK’s top-notch rating could be at risk unless action is taken, while the OECD on Thursday urged Britain to come up with a firm plan for cutting debt. [ID:nLI120973]

Though not their central scenario, analysts are mindful of the risk of a more serious fiscal deterioration coinciding with a weaker-than-forecast economic recovery next year, which could be a catalyst for sterling to drop below its recent ranges.

“The growth the UK is getting now is largely a reflection of articifial stimulus and the big test will come when that stimulus is taken away,” BNYM’s Mellor said.

“The problem is the UK has borrowed from tomorrow to fund growth it has already had.”

Next week, Wednesday’s second estimate of UK third quarter gross domestic product will be closely watched to see whether there is any upward revision to the previous estimate, which showed an unexpected 0.4 percent contraction. [ID:nLK384088]

Reporting by Jessica Mortimer, editing by Nigel Stephenson

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