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Sterling drops against dollar as rating cut clouds British outlook

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Sterling skidded against the dollar on Monday, as the US currency reasserted its safe-haven status and Britain's economic outlook was knocked further by a credit ratings downgrade.

[LONDON] Sterling skidded against the dollar on Monday, as the US currency reasserted its safe-haven status and Britain's economic outlook was knocked further by a credit ratings downgrade.

Last week the pound rose nearly 7 per cent against the greenback as measures to inject liquidity into markets by the US Federal Reserve and a US$2 trillion stimulus bill to offset the economic effects of the coronavirus pandemic cooled dollar demand.

Ratings agency Fitch cut Britain's sovereign debt rating on Friday, saying debt levels would jump as it ramped up spending to offset a near shutdown of the economy.

Facing what some economists say could be Britain's deepest recession in a century after the government ordered many businesses to close, finance minister Rishi Sunak announced a string of stimulus measures to try to curb unemployment.

Central to Sunak's plan is a commitment for the state to pay 80 per cent of the wages of workers who are temporarily laid off.

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One in five Britons fear an economic depression because of the impact of coronavirus and a further 52 per cent expect the economy to be in recession within a year, a poll showed.

The Bank of England, like other central banks, has also sprung into action, expanding its bond-buying programme by a record £200 billion and cutting its main interest rate to a record low 0.1 per cent.

Fitch said the measures were necessary to cushion the economy but it now expected Britain's public debt, as a share of gross domestic product, would rise to 94 per cent in 2020 and 98 per cent in 2021, from 84.5 per cent in 2019.

For an interactive version of the below chart, click here.

Doubts about Britain's future trading ties with the European Union posed a further risk, Fitch said.

The EU expects Britain to seek an extension of its post-Brexit transition period beyond the end of the year, diplomats and officials said on Monday, as negotiations on trade have ground to a halt due to the coronavirus pandemic.

By 4pm GMT, the pound was down 0.4 per cent at US$1.2386, off its highest levels since March 13.

Against the euro, however, sterling extended last week's gains, up 0.6 per cent at 88.92 pence per euro and hitting its highest level since March 13.

"The fundamentals suggest sterling is vulnerable," said Jane Foley, currency strategist at Rabobank in London, noting Britain's current account deficit, Brexit, and the worsening of Britain's public finances.

"One of the interesting parts of the (Fitch) downgrade was pointing not just to the worsening of public finances but also the Brexit element, pointing to concerns about the UK's trade agreement with the EU."

REUTERS

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