The 13-month low sparks fears that Britain's election outcome will hamper the nation's ability to slash sky-high public debt, analysts say.
Pound slumps against the dollar after UK elections
LONDON // The pound sterling slumped to a 13-month dollar low and London stocks sank on fears that Britain's election outcome would hamper the nation's ability to slash sky-high public debt, analysts said. A dealer for Currencies Direct, Phil McHugh, said: "We are in no-man's land at the moment and the markets do not like uncertainty ? this is leading to a sell-off in the pound," said the. The election has sparked the first official hung parliament since 1974, with the Conservative Party garnering the most seats but with no chance of winning an overall majority, results showed.
In reaction, the pound tumbled to $1.4476 ? its lowest level since April 2009 ? as it became increasingly clear that the Conservatives failed to clinch a decisive victory against the ruling Labour Party. The pound also slid to a one-month low against the Euro at ?1.1353. "The pound has been crippled ... by the spectre of political uncertainty," said Mark Bolsom, head of the UK trading desk at Travelex.
"A hung parliament really is the worst possible result for the pound and foreign exchange markets are very volatile. "Investors are concerned that a hung parliament will paralyse the formation of a credible deficit reduction plan," he said, adding that many were seeking traditional safe-havens like the dollar. Sterling later pulled back to stand at $1.4635 at about 9.30am BST (12.30pm UAE) in choppy trading.
The British stock market also sank by one per cent, slammed by sharp falls elsewhere amid mushrooming fears that the Greek debt crisis will spread across the eurozone. The European single currency had meanwhile plunged to $1.2529 yesterday, striking a 14-month low, on heightened concerns about Greece. Traders worried that the uncertain election outcome will affect the new British government's ability to slash the deficit and preserve the nation's top-level credit ratings.
However, international ratings agencies Moody's and Standard & Poor's said that the hung parliament verdict would not affect their top-level assessments. Moody's said the unclear outcome "does not directly threaten" Britain's coveted AAA rating. S&P said that the nation's AAA long-term sovereign rating with a negative outlook was unchanged. "The complexion of the new government is not, in itself, a factor for us," said S&P.
"Instead, our focus is on whether the government's fiscal consolidation plan to be unveiled in due course is likely or not to put the UK government debt burden on a downward trajectory over the medium term." The opposition Conservatives won the most seats but they failed to land a knock out blow against Prime Minister Gordon Brown. With not many of the 650 seats left to be counted, the Conservatives had 292 lawmakers compared to 251 for Labour, meaning it was impossible for the Tories to win the 326 seats they need to govern alone in the House of Commons.
The Liberal Democrats had just 52 ? a disaster for the third party after what had seemed to be a strong campaign. "It is now crucial to our economic recovery that the main parties agree on a credible plan ? indecision will threaten our credit rating and undermine the pound," added Mr Bolsom. Business leaders meanwhile labelled the hung parliament outcome a "political vacuum" and appealed for immediate action to show the way forward amid burgeoning worries about high level of public debt in the western world.
"It's vital that this political vacuum is filled as quickly as possible," said Miles Templeman, director-general of the Institute of Directors. "The country simply can't afford an extended period of political horse-trading which delays much needed action to tackle the deficit. "Politicians have postponed the difficult decisions on public spending cuts for too long already. Further delay will only jeopardise the future of the UK economy."
The new British government's priority will be to cut the deficit, which stands at £163.4 billion (Dh881.75bn), or 11.6 per cent of gross domestic product ? the highest level since World War II. Britain only just emerged from a record-length recession at the end of last year, ending a deep downturn that was rooted in the global financial crisis and lasted for six successive quarters. Markets are currently on red alert over soaring levels of public debt after crisis-hit Greece was forced to go cap-in-hand to the eurozone and the IMF for a ?110bn rescue package.