British pound tumbles on economic concerns

Sterling fell against a broadly firmer dollar on Monday on concerns about the UK economic and political outlook, erasing gains made after US ratings firm Moody's said Britain's sovereign rating was safe for now.

Weekend opinion polls indicated an indecisive result in Britain's upcoming election.

Financial markets fear a minority or coalition government would fail to effectively cut Britain's budget deficit, forecast to reach 178 billion pounds this year, or more than 12 per cent of gross domestic product.

"Politics continues to weigh heavily on sterling, leaving it the worst-performing G10 currency by a large margin," said Adam Cole, global head of FX strategy at RBC Capital Markets.

"The political risk premium built into sterling is large, but in our view, not yet large enough."

For a graphic plotting trade-weighted sterling versus a 5-day moving average of UK opinion polls, click here

By 3.07pm GMT (4.07am NZT), sterling was down 0.9 per cent to US$1.5044, after hitting a session low of US$1.5019. Selling accelerated after stop-loss sales were hit near US$1.5050/55 and as traders took profits on intraday short positions.

Data on Friday showed currency speculators slightly trimmed net sterling short positions to 63,473 in the week ended March 9, from 67,549 the previous week.

Comments by outgoing Bank of England policymaker Kate Barker saying the UK economy may contract again for one quarter and data from property website Rightmove showing slower house price growth also hurt the pound.

The euro was up 0.2 per cent at 90.85 pence but off from the day's highs of 91.30 pence.

Expectations of no quick fix to Greece's fiscal woes at a meeting of euro zone finance ministers in Brussels kept the euro pressured against the dollar.

FOMC, Bank of England minutes eyed

Traders were wary of making big bets in either direction ahead of the US Federal Reserve's policy decision on Tuesday.

Market players expect the Fed to hold policy steady but will be looking for any further dissent from policymakers as the central bank pushes on with its exit strategy.

The market will also look to the minutes of the latest BoE meeting, due out on Wednesday, which are expected to show a decision to leave policy unchanged was unanimous.

The chief interest for the market would be in any hints of a resumption of asset buying after top officials said they would leave the door open for further quantitative easing.

Also on the radar are latest UK public spending data due out on Thursday.

UK finance minister Alistair Darling will present a budget on March 24, just weeks before a national election expected to take place on May 6.

Ratings firm Moody's said even if the election produced a hung parliament where no party has an overall majority, the UK could still cling on to its top-notch status.

"We suspect strongly that any government elected - even a hung parliament - would be ready to make adjustments to reduce the deficit," Moody's senior vice president Kristin Lindow told Reuters on Friday.

"That's behind our stable outlook, despite the extreme deterioration on the fiscal front."

- Reuters