The pound fell sharply on Tuesday after a ratings agency said that the UK was the big economy most at risk of losing its AAA credit rating.
Sterling dropped more than a cent against the dollar after Fitch said that of all the AAA sovereign debt issuers – the US, Germany, UK and France – the UK was in most danger of losing the top rating because Britain needed “the largest budget adjustment”.
Worries over the health of the UK government’s finances have weighed on sterling during the past year as the bail-out of the banking sector has sent the country’s fiscal deficit soaring.
After a kneejerk sell-off, the pound recovered some poise as traders realised that the remarks contained little new information.
In May Standard & Poor’s revised the UK’s debt outlook to negative, while Fitch made clear on Tuesday that the UK’s AAA rating outlook was still stable.
Meanwhile, the UK government sought to calm investors’ nerves over the country’s fiscal position.
“We have assured people that we’re taking the necessary action to cut the deficit in half,” Gordon Brown, UK prime minister, told reporters in London.
“Our debt levels are roughly the same when this crisis ends as America, as France, as Germany.”
Jane Foley at Forex.com said: “The news is not new. That said, the appalling position of UK public finances is likely to be a strain on sterling for many months to come.”
Also adding to pressure on the pound were figures that showed an unexpected widening of the UK’s trade deficit in September.
Analysts said the figures implied that sterling’s weakness was not helping the UK pull out of recession.
The pound fell to a low of $1.6599 against the dollar, before recovering to stand down 0.2 per cent at $1.6732 late in New York.
Sterling fell less than 0.1 per cent to £0.8953 against the euro and lost 0.3 per cent to Y150.29 against the yen.
Meanwhile, the dollar stabilised after hitting a 15-month low on a trade-weighted basis on Monday.
The dollar was supported as the strong rally in risky assets lost some of its momentum.
It rose 0.2 per cent to $1.4976 against the euro, climbed 0.1 per cent to SFr1.0083 against the Swiss franc but eased 0.1 per cent to Y89.83 against the yen.
Elsewhere, the Taiwan dollar fell 0.2 per cent to T$32.355 against the US dollar after the country’s financial regulator banned foreign investors from placing funds in time deposits on concerns about currency speculation.
The Financial Supervisory Commission said foreign investors could not extend their existing time deposits when they mature.
