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Sterling slumps on Moody's downgrade

Monday, February 25 10:31:54

Pressure mounted on sterling this morning after Britain lost its precious AAA following a downgrade by Moody's.

The currency weakened during overnight trading in Asia, leaving it at a 31-month low against the US dollar and at a 16-month low against the resurgent euro.

The euro this morning was up about 1.0 percent against sterling which lost ground against major currencies after Moody's cut Britain's rating by one notch to Aa1 from Aaa, citing weak prospects for economic growth.

Sterling slumped to a 16-month low versus the euro of 87.75 pence per euro and 31-month low against the dollar of $1.5073 and was likely to remain vulnerable on expectations the Bank of England could expand its quantitative easing further to bolster the fragile UK economy.

ETX Capital market strategist Ishaq Siddiqi said: "Most in the markets see the downgrade as a symbolic move that will likely heat up the political discussions over the UK's damp economic growth prospects and spur the coalition Government to launch bolder policies to drive growth."

There had been rumours for a week or two that the downgrade was due, Eanna Black, Investec Bank Ireland, said today.

"This should have come as no real shock as Britain's AAA status had been on a negative outlook for nearly a year. S and P and Fitch both rate the UK at AAA with a negative outlook, and so we could see another downgrade at some stage. Interestingly only Germany and Canada have the highest possible rating of AAA, as the UK joins France & the USA as countries that recently lost their AAA mantle."

Moody's cited three reasons for the move; 1) a period of sluggish growth, now expected to last until the second half of the decade; 2) the related challenges to the fiscal consolidation programme, which is set to extend well into the next parliament; 3) a worsening in the 'shock absorption capacity' of the UK balance sheet, thanks to the high and rising debt burden which is not expected to reverse until 2016.