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Sterling skids lower after UK ratings downgrade darkens outlook

Reuters | Updated: 30-03-2020 15:08 IST | Created: 30-03-2020 14:11 IST
Sterling skids lower after UK ratings downgrade darkens outlook
Representative Image Image Credit: Pixabay

Sterling skidded lower against the dollar on Monday, as the greenback reasserted itself as a safe haven for investors amid the coronavirus pandemic and Britain's economic outlook took another hit in the face of a credit ratings downgrade.

The pound rose nearly 7 percent against the dollar last week as measures to inject liquidity into markets by the U.S. Federal Reserve and a $2 trillion stimulus bill passed by the U.S Congress cooled demand for the U.S. currency as a safe haven. Rating agency Fitch cut Britain's sovereign debt rating on Friday, saying the country's debt levels would jump as the government ramped up it's spending to offset the near shutdown of the economy in the face of the coronavirus.

Facing what some economists say could be Britain's deepest recession in a century after the government ordered many businesses to close to slow the spread of the virus, finance minister Rishi Sunak announced a string of stimulus measures to try to prevent a surge in unemployment. Central to Sunak's plan is a commitment for the state to pay 80% of the wages of workers who are temporarily laid off.

The Bank of England, like other central banks around the world, has also jumped into action, expanding its bond-buying program by a record 200 billion pounds and cutting its main interest rate to a record low 0.1%. 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% in 2020 and 98% in 2021, from 84.5% in 2019.

Doubts about Britain's future trading ties with the European Union posed a further risk, Fitch said. By 0817 GMT, the pound was down 0.6% at $1.2360, off its highest levels since March 13.

Against the euro, it was down 0.1% at 89.52 pence. "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 as dominating the fundamental outlook.

"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." Foley also noted the sickness of Britain's prime minister Boris Johnson, who has tested positive for coronavirus and shown symptoms, as being a negative for the pound.


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