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AAA loss: Pound falls as markets react to downgrade AAA loss: Pound falls as markets react to downgrade
(about 1 hour later)
Sterling fell during trading in Asia as financial markets reacted to the loss of Britain's top AAA credit rating.Sterling fell during trading in Asia as financial markets reacted to the loss of Britain's top AAA credit rating.
The pound fell to a 31-month low against the dollar and a 16-month low against the euro.The pound fell to a 31-month low against the dollar and a 16-month low against the euro.
Further falls are expected when markets open in Europe amid concerns that the credit downgrade points to further problems for UK economic recovery.Further falls are expected when markets open in Europe amid concerns that the credit downgrade points to further problems for UK economic recovery.
Ratings agency Moody's made the downgrade on Friday evening, the first cut since the 1970s.Ratings agency Moody's made the downgrade on Friday evening, the first cut since the 1970s.
The value of sterling has been edging down for several weeks amid speculation that the AAA rating was under threat. The value of sterling has been edging down for several weeks following concerns about the worsening outlook for the UK economy and speculation that the AAA rating was under threat.
In trade in Asia on Monday, it fell to $1.5073, while against the euro it was 1.145 euros. A euro is now worth 87.3p. In trade in Asia on Monday, it fell to as low as $1.5073. Against the euro it was 1.145 euros, making a euro worth 87.3 pence. As trading began in Europe, it moved back up to $1.5158.
The government has played down Moody's move, but Labour described it as a "humiliation" for the coalition, and said ministers must change course.The government has played down Moody's move, but Labour described it as a "humiliation" for the coalition, and said ministers must change course.
The pound fell late on Friday after the downgrade, with Moody's warning that growth would "remain sluggish" over the next few years.The pound fell late on Friday after the downgrade, with Moody's warning that growth would "remain sluggish" over the next few years.
Moody's also said the government's debt reduction programme faced significant "challenges".Moody's also said the government's debt reduction programme faced significant "challenges".
Chancellor George Osborne said the decision was "a stark reminder of the debt problems facing our country" but it did not mean the government should change course. 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.
"What is the message from the ratings agency? Britain's got a debt problem. I agree with that. I've been telling the country for years that we've got a debt problem, we've got to deal with it," he said.
"We've got to take tough measures to do that and I think people understand that."
Howard Archer, chief UK and European economist at IHS Global, said the pound would be "particularly vulnerable" after the downgrade, but the markets had been increasingly pricing in the AAA rating loss for some time.
But the Federation of European Employers warned Moody's decision could have a profound impact on the City of London as one of the world's top financial centres.
Secretary general Robin Charter said: "The downgrading of the UK's credit status is a blow for the UK as a leading financial centre and the UK balance of payments is so reliant on its financial services that even a small loss in trading income could affect the value of sterling and have a major impact on GDP."
'Difficult time'
Speaking on the BBC's Andrew Marr Show 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.
Shadow chancellor Ed Balls has described the downgrade as a "humiliating blow", and urged Mr Osborne to act fast to "kick-start our flat-lining economy". A weaker pound, while making exports cheaper, is also likely to push up the cost of imports and put upward pressure on inflation.
But former Conservative chancellor Ken Clarke said the coalition should "stick to" its policy, adding: "I think the way in which we will recover confidence is making clear we're a strong firm government, that the strategy we're on is the one that is eventually going to get things better and that the alternatives frankly are a bit odd." Shadow chief secretary to the Treasury, Rachel Reeves, said if the downgrading affects 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."
'Difficult time'
Former Conservative chancellor Ken Clarke said the coalition should "stick to" its policy, adding: "I think the way in which we will recover confidence is making clear we're a strong firm government, that the strategy we're on is the one that is eventually going to get things better and that the alternatives frankly are a bit odd."
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 enter a triple dip 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 enter a triple dip 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.