Pound Falls After Fitch Says U.K.’s Credit Rating Most at Risk

By Paul Dobson and Ron Harui

Nov. 10 (Bloomberg) -- The pound fell from a three-month high against the dollar after Fitch Ratings said the U.K.’s sovereign credit rating is most at risk among top-rated nations.

Sterling dropped versus all 16 of the most-traded currencies tracked by Bloomberg as David Riley, Fitch’s head of global sovereign ratings, said Britain needs “the largest budget adjustment” among countries it rates AAA. Standard & Poor’s has a “negative” outlook on the U.K.’s top-level rating after lowering it from “stable” in May. Reports published today show U.K. house prices and retail sales are increasing.

“If the AAA rating were to be lost that would have some fairly dramatic influences,” Jeremy Stretch, a senior currency strategist at Rabobank International in London, said. “It just reinforces the necessity of having a credible fiscal plan. It’s a very challenging environment.”

The U.K. currency declined as much as 0.9 percent, the most since Oct. 23, to $1.6602 and was at $1.6682 as of 10:30 a.m. in London. The pound dropped 0.5 percent to 89.94 pence per euro.

Fitch expects the U.K. government “will articulate a stronger fiscal consolidation program next year,” and has a “stable” outlook for the country’s rating, Riley said.

The pound fell even after the Royal Institution of Chartered Surveyors said in its monthly survey today that the number of real-estate agents saying prices rose exceeded those reporting declines by 34 percentage points, the most since December 2006. House prices rose 1.2 percent in September from the month before, the Department for Communities and Local Government said in a separate report today.

‘Buying Opportunity’

“The sell-off following the Fitch statement offers a buying opportunity” for the pound, Paul Robinson, a currency strategist in London at Barclays Capital, said in an investor note today. “Fitch stressed after the statement that there were no plans to change the U.K. rating. Other news has been more positive,” he said.

Britain last month reported the biggest budget deficit for any September since records began in 1993 as the recession ravaged tax revenue and drove up welfare costs. The 14.8 billion-pound ($24.7 billion) shortfall compared with a deficit of 8.7 billion pounds a year earlier, the Office for National Statistics said in London on Oct. 20.

The U.K. plans to issue 220 billion pounds of debt in the year through March 31. Increased government investment in U.K. banks will add an extra 13 billion pounds to the net cash requirement for this year, the Treasury said on Nov. 3.

The U.K. is among “resilient” Aaa rated countries, Pierre Cailleteau, managing director of sovereign ratings at Moody’s, said in an interview in Brussels on Nov. 6.

“We don’t see any defaults happening in developed countries,” he said.

U.K. government bonds advanced, with the yield on the 10- year gilt falling 2 basis points to 3.81 percent. The two-year security yield was little changed at 0.74 percent.

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.netRon Harui in Singapore at rharui@bloomberg.net

Last Updated: November 10, 2009 05:53 EST