The pound dropped for a second week against the dollar after Moody’s Investors Service cut the U.K.’s AAA credit rating and Bank of England Governor Mervyn King’s indicated he backed more economic stimulus.
Sterling declined to the lowest since July 2010 against the U.S. currency after Moody’s cut the U.K.’s rating one level to Aa1 and the minutes of the Monetary Policy Committee meeting, published on Feb. 20, showed that King voted to increase the central bank’s target for bond purchases to boost Britain’s economy. The Federal Reserve signalled it may slow the pace of its own asset-buying program.
“While this downgrade is not unexpected, it will remind markets of the challenges the pound faces in 2013,” Daragh Maher, a senior foreign-currency strategist at HSBC Holdings Plc in London, wrote in a note. “In addition, while the pound has already fallen this year, the drop has been small when framed in the context of a longer time-frame, so further falls would not represent an overshoot.”
The pound slid after Moody’s downgrade in the last half-hour of trading in New York yesterday, dropping 0.6 percent to $1.5163, the lowest since July 2010. It brought the week’s decline to 2.3 percent. The currency had fallen 1.8 percent the previous week. Sterling depreciated 1 percent to 86.99 per euro after reaching 87.65 pence on Feb. 20, the weakest since October 2011.
The outlook on the U.K.’s debt changed to stable from negative, Moody’s said in a statement yesterday. The agency cited weakness in the nation’s growth outlook and challenges to the government’s fiscal consolidation program for the downgrade.
Further asset purchases by the U.K. central bank “could help the process of rebalancing the economy,” minutes from the Monetary Policy Committee meeting showed. King and Paul Fisher joined David Miles in voting to raise the target by 25 billion pounds ($38 billion) to 400 billion pounds.
The U.S. central bank released minutes of its January policy-making committee meeting on Feb. 20, showing continued debate about how long to undertake open-ended bond buying to bolster the economy, spurring speculation they could slow the amount of purchases in the future. Federal Reserve Chairman Ben S. Bernanke will make his semi-annual testimony on Congress Feb. 26-27.
“There’s a very clear divergence of future expectations of monetary policy between the U.K. and the U.S.,” said Peter Kinsella, a currency strategist at Commerzbank AG in London. “With that we have seen the pound trade a lot lower. There’s definitely more of a downside and by the end of this year we could see the pound trading around the $1.45 to $1.47 area.”
The U.K.’s King, Miles and Fisher were outvoted by the remaining six members of the MPC, the minutes of the Feb. 7 meeting showed. Economists had predicted only one policy maker voted for more quantitative easing.
The U.K. economy contracted 0.3 percent in the three months through December 2012, after expanding 0.9 percent in the previous quarter, according to the median estimate of economists in a Bloomberg News Survey. The Office for National Statistics will release the data on Feb. 27.
The pound has fallen 5.6 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 2.1 percent and the euro rose 1.8 percent.
The yield on 10-year gilts dropped nine basis points, or 0.09 percentage point, from last week to 2.11 percent. The 1.75 percent bond due September 2022 rose 0.72, or 7.20 pounds per 1,000-pound face amount, to 96.93.
U.K. government bonds lost 2.1 percent this year through Feb. 21, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds dropped 1.2 percent and Treasuries fell 0.7 percent.
Britain’s debt as a percentage of gross domestic product will climb to 98 percent next year from 90 percent last year and 95.4 percent in 2013, the European Commission said in its winter forecast yesterday.
With the U.K.’s high and rising debt burden, deterioration in the government’s balance sheet is unlikely to be reversed before 2016, Moody’s said in the statement.
Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December. Investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by S&P. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974.
“The comfort expressed by the gilt market is largely built on the idea that the U.K. can print its own money and therefore avoid defaulting on its debt,” Maher at HSBC wrote. “However, while this may let bond investors sleep easier, it will keep investors in the pound awake at night.”