June 8 (Bloomberg) -- Sterling fell against its major peers while the Australian and Canadian dollars rose as Fitch Ratings said the U.K.’s fiscal challenge is “formidable,” fueling demand for currencies of nations with strong balance sheets.
The dollar rose against the yen after Federal Reserve Chairman Ben S. Bernanke said the U.S. recovery is moving at a “moderate” pace. The Japanese currency fell against most major counterparts as Bernanke said he didn’t know when the Fed would begin the process of raising interest rates, boosting demand for higher-yielding currencies.
“The Fitch comments were a warning shot and highlight the risks if the U.K. doesn’t release a plan that’s strict and credible,” said Camilla Sutton, a Bank of Nova Scotia currency strategist in Toronto. “Bernanke’s comments were reassuring. Monetary policy will be looser for longer, and that’s a big benefit to markets that’s not fully priced in.”
The pound fell 0.5 percent to $1.4394 at 8:52 a.m. in New York, from $1.4468 yesterday. The yen slipped 0.1 percent to 91.48 per dollar, from 91.37 yesterday. Japan’s currency slid 0.3 percent to 109.27 yen per euro, from 108.95. It touched 108.08 yesterday, the strongest since November 2001. The euro was little changed at $1.1928, compared with $1.1923 in New York yesterday.
Australia’s dollar climbed 1.3 percent to 74.98 yen on speculation traders would boost carry trades, in which they borrow money in countries with low interest rates to purchase higher-yielding assets. Japan’s benchmark lending rate of 0.1 percent, compared with 4.5 percent in Australia, makes the yen a popular choice for funding such transactions.
U.K. Budget Deficit
Fitch suggested that British Prime Minister David Cameron will need to speed up budget-deficit cuts to protect the U.K.’s top credit rating. Treasury estimates show government debt- interest costs reaching 70 billion pounds ($101 billion) in five years, up from 31 billion pounds in the last fiscal year.
“The scale of the United Kingdom’s fiscal challenge is formidable and warrants a strong medium-term consolidation strategy, including a faster pace of deficit reduction than set out in the April 2010 budget,” Fitch said in the first statement by a credit-rating firm to discuss the U.K. since Cameron took office May 11.
The new government will unveil its emergency budget June 22, when Chancellor of the Exchequer George Osborne sets out reductions needed to tackle a deficit that rose to 11.1 percent of gross domestic product in the fiscal year through March.
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