The pound dropped to its lowest level in almost two months against the dollar, as the UK government’s pre-Budget report focused attention on the health of the country’s finances.
In spite of heightened sensitivity to sovereign risk, Alistair Darling, the UK finance minister, delivered a fiscally neutral package.
Concerns about government debt have come to the fore in recent days following a downgrade of Greece’s credit rating by Fitch, the ratings agency, on Tuesday.
That has weighed on sterling, given the possibility the UK may face a similar fate if it does not get its public finances in order. Analysts said the government had deemed it too early to begin an assault on the UK’s budget deficit, however, because of fears that deep spending cuts could choke off an economic recovery.
James Knightley at ING Capital Markets said the pre-Budget report would do little to dissuade ratings agencies from paying even closer attention to the state of the UK’s finances.
While cutting his growth forecast for this year, Mr Darling kept his forecast of a strong recovery next year and in 2011 and 2012.
Mr Knightley said even with this very aggressive growth profile, the UK’s public sector borrowing remained extremely elevated for years to come.
“If growth disappoints, and we believe it will, then the borrowing numbers will be much higher, necessitating even more aggressive fiscal retrenchment at a later date,” he said. “This of course will further hammer down the UK’s growth prospects.”
The pound fell to a low of $1.6164 against the dollar in early trade, its weakest level since October 15, before recovering some poise to stand down 0.5 per cent at $1.6208 by midday in New York.
Sterling fell 0.6 per cent to £0.9080 against the euro and dropped 1.1 per cent to Y142.27 against the yen.
Meanwhile, the euro reached its lowest level in more than a month against the dollar as fears about the health of the finances of Greece and Spain weighed on the single currency.
Following Fitch’s downgrade of Greece on Monday, fellow ratings agency S&P revised its outlook on Spain’s credit rating outlook from stable to negative.
The euro hit a low of $1.4667 against the dollar, its weakest level since November 3, before recovering to stand up 0.1 per cent at $1.4721.
The yen rose after Japanese growth was revised sharply lower in the third quarter. Analysts said the news boosted haven demand for the Japanese currency, as falling risk appetite dented domestic demand for overseas assets.
The yen was up 0.7 per cent to Y87.76 against the dollar.
