News on UK public finances hits sterling

The pound falls against the dollar, yen and the euro

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Sterling was punished on Wednesday after the UK Treasury revealed the state of public finances and its borrowing requirements in the coming fiscal year, as well as economic growth expectations.

Alastair Darling, the Chancellor of the Exchequer, said finances would not come into balance until 2016, with net debt peaking at 79 per cent of gross domestic product in 2014. Meanwhile, growth forecasts were slashed, and even projected growth of 1.25 per cent by 2010 was doubted by many currency analysts.

“This seems unlikely given that the deleveraging process will take several years,” said James Knightley at ING. “At the same time households will be saving as unemployment continues to rise and wages fall.”

Earlier in the session, data showed that although the number of new claimants rose by less than expected in March, the official unemployment rate held at 4.5 per cent, its highest level since 1998. Furthermore, average earnings fell 2.1 per cent in February, the weakest on record, leaving the three-month rolling annual rate of increase at just 0.1 per cent, another record low.

The pound fell 1.1 per cent to $1.4519 against the dollar, lost 1.5 per cent to Y142.60 against the yen, while the euro rose 1.6 per cent versus the pound to £0.8963.

There was much volatility elsewhere. With foreign exchange markets still focused on risk sentiment, the afternoon turned turbulent as equity market players decided how to interpret the latest raft of US earnings reports.

There was good news from AT&T and Boeing, but results from banking group Morgan Stanley cast a shadow over the financial sector as its profits were hit by bad debt provisions and writedowns.

The US dollar and the yen initially advanced at the expense of higher-yielding units such as the Australian and New Zealand dollars and emerging market currencies, but reversed as equity markets moved into positive territory.

Investors have now digested a number of banking results in recent sessions, and the response has been mixed. Equities rallied last week after stronger-than-expected profits from Goldman Sachs and JPMorgan, but sold off in response to similar results from Bank of America on Monday.

“To guess how markets will react to positive or negative surprises at the moment is as good as a coin flip,” said Richard Wiltshire at ETX Capital.

The euro managed to reverse early losses against the dollar to trade 0.6 per cent higher at $1.3016, while the yen outperformed the dollar, up 0.5 per cent to Y98.12.

But high yielders remained weak as risk appetite remained fairly fragile.

The New Zealand dollar fell 0.8 per cent to $0.5574 and 1.6 per cent to Y54.56, while the Australian dollar lost 0.3 per cent to $0.7079 and 0.8 per cent to Y69.44.

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