Sterling steadies after loss of UK AAA credit rating

The pound stabilised on Monday after a sharp fall over the weekend after the loss of the UK's top AAA credit rating.

Having fallen to a two-and-a-half year low against the dollar and a 16-month low against the euro at lunchtime, sterling recovered in late trading.

Longer-term, analysts expect the fall in value of the pound to continue. It has lost about 7% of its value against the dollar and euro this year.

On Friday, ratings agency Moody's cut the UK's credit rating.

The value of sterling has been edging down for several weeks following concerns about the worsening outlook for the UK economy and suggestions that policymakers would be comfortable with a weaker pound.

During early trading on Monday, sterling dropped as low as $1.5069 against the dollar, before recovering to $1.514. Against the euro, the pound hovered around 16-month lows with the pound worth 1.148 euros.

Data from the US Commodity Futures Trading Commission shows that speculators continue to sell in the hope it will fall further and they can buy it back cheaper in the future.

Moody's downgrade from AAA to AA1 included a warning that growth would "remain sluggish" over the next few years. The agency said the government's debt reduction programme faced significant "challenges".

The two other main rating's agencies, S&P and Fitch, warned last year that their own AAA rating might be downgraded if the UK's economy did not improve.

Speaking in response to an urgent question in the House of Commons, Chancellor George Osborne said the government had to continue with its austerity plans or risk further downgrades.

"Ultimately that is the choice for Britain: we can either abandon our efforts to deal with our debt problems and make a difficult situation very much worse, or we can redouble our efforts to overcome our debts

In reply, shadow chancellor Ed Balls said it was time for a new economic approach.

"The chancellor needs to get out of his denial and get a new plan on growth, the jobs and the deficit that would actually work," he said.

"Or else the prime minister would need to get a new chancellor."

'Not optimistic'

Jim Rogers, a long-time investment partner with George Soros, told the BBC that he expected sterling "to continue to go down further in real terms".

He said he was "not optimistic" about the UK economy, but added that several economies, including Japan and the US, were also in "serious trouble".

On Sunday, Business Secretary Vince Cable dismissed the downgrade as "largely symbolic". Mr Cable likened credit ratings agencies to "tipsters" and part of the "background noise we have to take into account", suggesting they had a "pretty bad record" on economic and corporate forecasting.

He said the US and France had both survived similar cuts to their ratings in the past.

"In terms of the real economy, there is no reason why the downgrade should have any impact... these things do not necessarily affect the real economy but they do reflect the fact that we are going through a very difficult time," he said.

'Debt junkie'

A weaker pound, while making exports cheaper, is also likely to push up the cost of imports and put upward pressure on inflation.

Shadow chief secretary to the Treasury, Rachel Reeves, said if the downgrading affected the value of the pound people could really start to suffer.

She told the BBC on Monday: "I think the prospect of the pound being weaker is actually very bad news for the economic recovery, and very bad news for families who are already struggling with rising gas and electricity prices, rising petrol prices, rising transport prices, and for pensioners as well who've seen those essentials go up it's really, really tough for them right now."

The downgrade by Moody's also sparked comment on whether financial markets should give credence to ratings agencies.

Dr Tim Morgan, global head of research, at Tullett Prebon, said in a blog: "Tempting though it is, one should not attach too much importance to the decision by Moody's to strip the UK of its AAA credit rating. For a start, credit rating agencies' own credibility hasn't recovered - perhaps it never will - from their role in the sub-prime fiasco.

"More to the point, this [downgrade] doesn't tell us anything we didn't already know - Britain is a debt-junkie, seemingly incapable of living within its means."

Moody's move failed to dent the FTSE 100's upward trend this year, with the index ending the day higher, up 0.3% at 6355.37 points.

David Cummings, head of equities at Standard Life, said share markets had long discounted a possible downgrade. He questioned the ratings agencies' track record, especially during the height of the global financial crisis.

He told the BBC that when the US was downgraded from AAA the impact was barely noticeable. "Since the US was downgraded [in August 2011] it has never looked back," he said.

The UK is at risk of slipping back into recession for the third time since 2008.

The economy grew in the third quarter of last year, boosted by the impact of the Olympics, but shrunk again by 0.3% in the last three months of 2012 and would re-enter recession if it contracted in the first quarter of 2013.

Germany and Canada are the only major economies to currently have a top AAA rating, as much of the world has been shaken by the financial crisis of 2008 and its subsequent debt crises.