Pound falls as Fitch warns of UK's ‘formidable’ debt challenge

The pound fell in late morning deals after credit ratings agency Fitch warned the debt challenge facing the UK government was 'formidable', and that cuts would have to be deeper and quicker than former chancellor Alistair Darling had planned.

The pound was down one cent or 0.5% against the dollar at $1.4393, and one cent lower against the euro at €1.2082.

Mark Bolsom, head of the UK trading desk at Travelex, said: 'The gloomy outlook from Fitch is weighing heavily on sterling this morning and will have heightened investor fears of a debt downgrade to the UK sovereign debt rating.'

Bolsom said the fact that Fitch had felt the need to comment on the UK deficit again was an indication that it is still considering downgrading the UK’s sovereign debt rating.

The note from Fitch also pushed gold to new highs, up $8.80, or 0.71%, to $1249 an ounce as investors fled from risky assets. 

Fitch said the rise in public debt in the UK since 2008 was faster than in any other 'AAA' rated country, and that the UK needs to do more than almost any other advanced country to bring debt back down to more acceptable levels.

And it said the task ahead will be difficult given growth forecasts will probably be lowered.

'While a similar deficit reduction path to that set out in the April 2010 Budget, but based on more realistic growth assumptions might be viewed as more credible, it would still run the risk of leaving the UK as something of a standout relative to the deficit targets of other advanced country sovereigns,' Fitch said.

Both the size of the UK deficit currently projected for 2011 and the failure to reduce it to 3% of GDP within five years are striking, the agency said.

It said a more ambitious deficit reduction path – with borrowing 1% lower than the April 2010 Budget throughout the medium term - would help to create a cushion against future shocks.