Sterling is expected to come under fresh pressure following the downgrading of the UK's economic prospects by Moody's.
Pound under pressure as UK loses triple-A debt rating
The British pound is expected to come under fresh pressure in the foreign exchange markets following the downgrading of the United Kingdom's economic prospects by Moody's Investors Service.
The ratings agency stripped the UK of its triple-A debt rating on Friday, forcing sterling to a two-year low against the US dollar.
Regional economists said the pound was likely to fall further when markets reopen after the weekend. Simon Williams, the Middle East chief economist for HSBC, said: "Sterling has been under a lot of pressure for some time, but my sense is that the downgrade is not fully priced in yet. I can see sterling slipping further, perhaps all the way to $1.50 [Dh5.51]."
Sterling dropped nearly a cent to $1.5163 in late trading after the announcement, and also fell against the euro, to €1.1495 (Dh5.64).
Moody's downgrade was prompted by renewed concerns about the prospects for the UK economy, which has been in "austerity mode" for at least two years as the British government sought to tackle high levels of debt.
"I think this will prompt a broader rethinking of the UK economy and sterling. Britain was engaged in US-style quantitative easing [QE] simultaneously with euro-style austerity policy, yet the growth just wasn't there," said Mr Williams.
The repercussions for British economic policy were likewise highlighted by Marios Maratheftis, the regional head of research for Standard Chartered.
"Moody's action was caused more by worries about growth than about debt, so it highlights the fact that the UK's austerity programme has been self-defeating. It has not worked, hence the downgrade," he said. "This decision could lead to expectations about greater QE by the Bank of England, and if that happens it would be good for growth but bad for sterling."
There is little likelihood of a significant change in the interest rate environment, Mr Maratheftis believes. "I can see no impact on the rates market, and if there was a small effect it would only last a few days," he said.
Neither economist thought there would be a significant effect on trade between the UK and UAE, most of it dollar-denominated.
Moody's lowered its assessment of UK sovereign debt by one notch to Aa1, the first time Britain has lost the triple-A rating. The agency said that sluggish economic growth and austerity would continue to affect government finances into the second half of the decade.
It said that growth in GDP would be 1 per cent this year, compared with its previous forecast of 1.4 per cent.
Moody's is the first of the big three major ratings agencies to remove the UK's triple-A status, but the other two - Standard & Poor's and Fitch - could come under pressure to follow suit.
Lowering a country's sovereign debt rating usually means it has to pay more for its borrowings on the international capital markets, but in the case of the US and France, both of which had their top-level ratings removed by raters in the past 18 months, any effect on rates was brief.
In both countries, government gilt-edged securities have rallied after the initial downgrade, as have equity markets.
The Moody's action is likely to cause political fallout in the UK, with opposition calls for an abandonment of the austerity policy and increasing rifts within the coalition government.