Sterling falls to 21-month low vs dollar amid growth worries

By Joice Alves

LONDON (Reuters) -Sterling held near its lowest levels since 2020 on Tuesday against a broadly firm dollar, with worries about Britain's economic outlook exacerbated by latest debt numbers and fears that COVID-19 restrictions in China will hurt world growth.

Sterling was down 0.6% at $1.2660 at 1430 GMT, after falling to its lowest versus the dollar since July 2020.

It is down 3.7% this month against the dollar and set for its biggest monthly fall since July 2019, with growing signs of a weakening economic outlook hurting the currency.

Data on Tuesday showed British government borrowing in the recently ended 2021/22 financial year was almost 20% higher than forecast by the country's budget office last month.

That underscored the challenge for finance minister Rishi Sunak, who is under pressure to give new help to households and businesses hit by surging inflation, but who says he wants to fix the public finances after his COVID-19 borrowing surge.[nL5N2WO3ZP]

"There is little sign of the pound moving back into favour with this morning’s borrowing data highlighting the difficulties of the Chancellor in softening the impact of the cost of living crisis given the increased weight of debt maintenance," said Jane Foley, head of currency strategy at Rabobank.

Fears, meanwhile, that more stringent COVID-19 measures in China could slow down the global economy encouraged investors to buy the safe-haven dollar as Beijing ramped up plans for mass-testing of 20 million people.

The pound fell to a three week-low against the safe-haven Japanese yen and to a 13-day low against the Swiss Franc. Versus the yen, it was down 1.3% to 161, while it dropped 0.7% to 1.2125 against the Swiss Franc. [FRX/]

Against the euro, sterling fell 0.33% to 84.33 pence, not far from a three-week low of 84.41 touched on Monday.

Money markets further scaled back bets on the size of Bank of England (BoE) rate hikes, pricing in around 140 basis points worth of tightening by year-end versus 150 bps on Monday.

Analysts said fears of a recession and a slowdown in the jobs market may encourage the central bank to pace its monetary tightening plans. [IRPR]

Rabobank's Foley said she expected another 25 basis point rate hike in May to "only add to fears of a growth slowdown".

"Sterling may fail to pick up much traction from a rate announcement next week," she said.

Britain's cost of living crisis will have a severe impact on economic growth this year but the BoE will still lift rates again next week, marking its fourth consecutive meeting of increasing borrowing costs, according to a Reuters poll published on Tuesday.

(Reporting by Joice Alves; Editing by Dhara Ranasinghe and Mark Potter; Editing by Andrea Ricci)