Sterling fell against the dollar and euro on Friday as investor confidence in the UK economy took another knock after a press report that the Treasury is working on plans to relax its fiscal rules, allowing more borrowing. The Financial Times said Treasury officials were privately working on plans to reform rules that govern public finances.
These say the government borrows only to invest over the economic cycle and that public debt should be limited to 40 percent of GDP. Finance minister Alistair Darling said the British government has made no decision on whether to reform the rules governing public finances.
However the report added to a sense that the UK economy is facing severe headwinds and that the government is unable to do much to support it. "It's seen as negative because it undermines the credibility of the government and any shift in policy will lead to a wave of media criticism and that will hit the pound, and cable specifically," said Robert Minikin, senior FX strategist at Standard Chartered.
By 1353 GMT the pound was down 0.3 percent at $1.9956. The euro was up 0.25 percent at 79.39 pence. In a sign that the government's fiscal rules may have to be altered, the UK's public sector's borrowing rose more than expected to a series high for June.