Pound plummets against dollar and euro

The value of the pound has reached new lows after Britain’s credit rating was cut on Friday - and it could get worse

RELATED QUOTES

SymbolPriceChange
GBPUSD=X1.6773-0.0052
GBPEUR=X1.2140-0.0048

Sterling fell to a two-and-a-half year low against the dollar and a 16-month trough against the euro on Monday after the loss of one of the UK's prized triple-A credit ratings.

More falls are likely in the near future given a grim outlook for the British economy, the prospect of more monetary easing and growing evidence that the Bank of England is comfortable with a falling currency as it seeks to rebalance the economy and encourage more exports.

Moody's on Friday cut Britain's rating by one notch to Aa1 from Aaa, citing weak prospects for economic growth. Britain joined the United States and France in having lost its triple-A rating from at least one major agency.

So far this year sterling has lost nearly 7% against the dollar while the euro has gained 7.5% against the pound.

[Related feature: The winners and losers of the great currency war of 2013]


Latest falls

The pound was down 0.1% against the dollar at $1.5155, having fallen to $1.5073 earlier in the session, its weakest since mid-July 2010. Traders said any bounce towards $1.5250-$1.5300 would be sold into as more speculators and investors take a dim view and build bets against the currency.

The euro was up 0.8% at 87.22 pence, not far from a 16-month high of 87.75 pence. Investors who bought UK gilts as a way of seeking safety from the euro zone crisis last year continued to turn around those bets; gilt futures fell more than 50 ticks in early trade.

[Related links: The latest pound-euro and pound-dollar exchange rates]

"[The rating cut] reinforces the perilous economic position the UK is in. It supports the unwinding of the safe haven trade too," said Kathleen Brooks, research director at Forex.com.

"This downgrade may fuel more speculation that quantitative easing will be re-started later this year. This is pound negative for the medium term and we could see sub- $1.50 in the near term."

More quantitative easing is seen as a negative for the currency as it involves the central bank printing more money to buy bonds. That increases the supply of the currency and puts more pressure on its value.

Sterling was already under pressure last week after Bank minutes showed policymakers, including Governor Mervyn King, edging closer to another round of easing. The bank's quarterly report earlier this month also said policymakers were prepared to tolerate higher inflation to support growth.

"By moving the goal post of its 2% inflation target from two to three years, the Bank has reduced real rate expectations, markedly pushing the pound lower," Morgan Stanley said in a morning note.

"Now rising inflation and pound weakness will pare living standards back down. We expect sterling to fall further and Friday's rating downgrade was a marginal event in dictating the future path of the currency."


(Source: Reuters. Additional reporting by Philip Baillie; editing by Patrick Graham)