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Sterling under pressure after Moody's cuts UK's AAA rating Sterling under pressure after Moody's cuts UK's AAA rating
(about 1 hour later)
The pound came under pressure on Monday as currency traders reacted to the UK's loss of its top AAA credit rating.The pound came under pressure on Monday as currency traders reacted to the UK's loss of its 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, sterling showed signs of recovering by midday.Having fallen to a two-and-a-half year low against the dollar and a 16-month low against the euro, sterling showed signs of recovering by midday.
But the downturn resumed amid reports that traders were shorting the pound - betting it would fall further.But the downturn resumed amid reports that traders were shorting the pound - betting it would fall further.
Chancellor George Osborne will comment on the downgrade to MPs later after Labour was granted an urgent question. Chancellor George Osborne said the government had to continue with its plans or risk further downgrades.
Speaking in response to an emergency question in the House of Commons, the chancellor said again that it would "redouble" its efforts to cut the deficit, the amount that the government has to borrow to cover the shortfall in its finances.
Ratings agency Moody's cut the UK's credit rating on Friday, the first cut since the 1970s.Ratings agency Moody's cut the UK's credit rating on Friday, the first cut since the 1970s.
Despite initially falling in Asian trading, the pound pared losses by Monday lunchtime, while the FTSE 100 was trading 0.7% higher.Despite initially falling in Asian trading, the pound pared losses by Monday lunchtime, while the FTSE 100 was trading 0.7% higher.
However, sterling remains under pressure again and data from the US Commodity Futures Trading Commission shows that speculators continue to short sell in the hope they can make money from further falls in the currency's value.However, sterling remains under pressure again and data from the US Commodity Futures Trading Commission shows that speculators continue to short sell in the hope they can make money from further falls in the currency's value.
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.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 to $1.5069 against the dollar, before recovering to $1.5144. Against the euro, the pound hovered around 16-month lows with one euro worth 0.8745 pence.During early trading on Monday, sterling dropped to $1.5069 against the dollar, before recovering to $1.5144. Against the euro, the pound hovered around 16-month lows with one euro worth 0.8745 pence.
This year so far sterling has lost nearly 7% against the dollar, while the euro has gained 7.5% against the pound.This year so far sterling has lost nearly 7% against the dollar, while the euro has gained 7.5% against the pound.
Over the weekend the government played down Moody's move, but Labour described it as a "humiliation" for the coalition and said ministers must change course.Over the weekend the government played down Moody's move, but Labour described it as a "humiliation" for the coalition and said ministers must change course.
'Largely symbolic''Largely symbolic'
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".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.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.
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".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".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.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.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."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''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.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.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."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.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.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.""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 up 0.7% at 6377.7 points at lunchtime.Moody's move failed to dent the FTSE 100's upward trend this year, with the index up 0.7% at 6377.7 points at lunchtime.
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.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.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 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.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.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.