LONDON (Reuters) - Sterling fell sharply on Friday, falling more than 1 percent to a two-week low against the dollar on concerns over the fiscal health and waning investor appetite for perceived risky currencies.
Data on Thursday showed public finances deteriorated almost twice as fast as expected last month, raising the risk the government will have to increase its borrowing forecasts in December's pre-budget report.
The government faces mounting pressure to spell out how it will curb public borrowing as it prepares to fight an election due by June 2010, amid worries that record debt levels will threaten Britain's triple-A sovereign debt rating.
These concerns kept the pound under selling pressure, particularly as they coincided with investors taking profits on the recent rise in riskier currencies against the dollar and the yen.
"Clearly the UK debt position is horrendous," said Rabobank strategist Jeremy Stretch. "This will not provide any comfort for sterling and it may well struggle and could close the week close to the bottom of its recent trading ranges."
By 12:31 p.m., sterling fell 1.1 percent on the day to $1.6479, close to an earlier two-week low of $1.6460.
It also fell sharply against the euro, hitting a one-week low of 90.10 pence per euro, and lost more than 1 percent against the yen to a 17-day low of 146.47 yen.
This helped push sterling's trade-weighted index to a one-week low of 80.4
Sterling is on track for a fall of around one and a half percent against the dollar this week, with the currency erasing all of the gains enjoyed on Monday when it hit a three-month high just shy of $1.69.
These gains were largely a result of investors unwinding substantial bets that had built up on the pound falling, but the broader negative sentiment towards the currency remains intact.
STERLING UNDER PRESSURE
Concerns about mounting government debt and the belief that interest rates will stay very low for many months to come have ensured sterling has remained weak throughout this year, with only a few forays below the 85 pence per euro mark.
"The pressure on sterling will not abate. The Bank of England is in no rush to change its very loose monetary policy and sterling should stay weak against the euro," Bank of New York Mellon currency strategist Neil Mellor said.
Rating agencies have warned the country's top-notch rating could be at risk unless action is taken, while the OECD on Thursday urged Britain to come up with a firm plan for cutting debt.
"Worrying fiscal data is also not new information as far as the pound is concerned, but the size of the deficit surprised and with sentiment already turning against the currency on risk grounds, provided a timely excuse to knock it further," Calyon currency strategist Stuart Bennett said in a note.
"A quiet data calendar and the risk of more dollar upside perhaps signal more problems ahead for sterling," he added.
Richard Lambert, the head of the Confederation of British Industry, told Reuters in an interview it was important that the UK's triple-A rating was "beyond discussion."
However, he said the economy was "stabilising" and urged the Bank of England to be cautious of extending its quantitative easing programme any further.
(Reporting by Jessica Mortimer, editing by Chris Pizzey)
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