Last updated: February 22, 2013 8:16 pm

Sterling falls sharply in late NY trading

Sterling against the dollar

The pound fell sharply in the last half-hour of trading against the dollar and the euro after Moody’s downgraded the UK government debt a notch to Aa1.

The rating agency cited the coalition’s “significant policy commitment to austerity” as a drag on the economy.

The pound fell to a new two-year low against the dollar at $1.5163 and fell to €1.1495 against the euro on the news. Before the big move late in the session on Friday the pound was trading flat against the dollar and the euro.

Sterling had moved to multi-month lows earlier in the week against both currencies amid worsening sentiment on the UK after the Bank of England revealed that three out of its nine members on its Monetary Policy Committee had voted for more easing to help boost UK growth.

The euro fell to a fresh six-week low against the dollar after the European Central Bank said the region’s banks were set to pay back a far lower amount of the cheap funding they received during the eurozone crisis than had been expected.

The euro lost 0.1 per cent to hit $1.3144, its weakest level since the start of January, after the ECB announced that the second round of loan repayments under its longer-term repayment operations would be just €61bn.

The move means there will be more liquidity in the system than had been expected, leading to a weaker euro.

“The release should leave concerns about the outlook of the eurozone banking sectors in place and add to bets that the ECB could ease further down the road,” said Valentin Marinov, analyst at Citigroup.

Separately, the European Commission unveiled growth forecasts for the eurozone that were lower than expected, predicting that the eurozone as a whole would shrink 0.3 per cent this year. In November, it had predicted growth of 0.1 per cent.

The Australian dollar was one of the biggest gainers in the currency market on Friday after the head of Australia’s central bank said interest rates were at an “appropriate level”, leading investors to lower their expectations of a further rate cut.

The Aussie rose 0.8 per cent against the US dollar to $1.0340, reversing losses earlier in the week after it hit a five-month low following forecasts that the central bank would ease monetary policy further.

The US dollar continued to trade near a five-month high after the US Federal Reserve revealed earlier in the week that some of its members were concerned about the effects of long-term monetary easing, leading to expectations the central bank’s bond-buying programme could come to an end sooner than expected.

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