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Sterling fell sharply today after credit ratings agency Standard & Poor's cut its outlook for the UK on fears over ballooning levels of Government debt.
The world's biggest ratings agency declared that there is a one in three chance of Britain losing its coveted AAA status.
The pound crashed to as low as $1.5514 against the US dollar in the minutes after S&P's shock declaration at 9.30am, having earlier traded at a six-month high of $1.5817.
It fell against a host of other currencies as investors ran for cover after S&P lowered its outlook for the UK from "stable" to "negative".
Chris Turner, head of FX strategy at ING, said: "Today's outlook change suggests sterling will require an extra risk premium over coming quarters and may rein in some of those more-bullish calls for sterling-dollar."
Geoffrey Yu, currency analyst at UBS in London, said: "This was really unexpected, and there are several risks involved.
"Some countries hold sterling as a reserve currency, albeit small, so there could be massive selling of that, as well as concerns about debt servicing given Britain is highly leveraged and depends on foreign financing."
S&P maintained the UK's AAA rating but warned it could be cut if the public finances continue to deteriorate.
It warned that Government debt could hit 100% of gross domestic product by 2013 and "remain near that level thereafter". It is currently at 53.2% of GDP and rising.
Rival agency Moody's said the outlook for its UK sovereign rating was stable and not under review.
"While the UK economy and public finances face considerable challenges, the Government has both enough balance-sheet flexibility to absorb the shock and the capacity to reverse the damage over time," it said.
Gilt prices also came under pressure following the shock downgrade but it did not disrupt the gilt auction just a couple of hours later.
Chancellor Alistair Darling said the success of the auction, in which £5 billion of five-year bonds were sold, showed the confidence investors have in the UK economy.
City economists were less bullish, however. "The threat of a downgrade has been an accident waiting to happen given the poor state of the public finances and this year's Budget which failed to address the problems," said Philip Shaw, chief UK economist at Investec.
Kenneth Broux at Lloyds TSB Corporate Markets said it was "a reality check for the UK government".
Sentiment was dealt a further blow when the Federal Reserve cut its forecast for the US economy and former Fed chairman Alan Greenspan said banks are still in peril.
The Fed said there were "significant downside risks" to the economy and the global financial system was still "vulnerable to further shocks".
Greenspan warned US banks will need to raise "large" amounts of money and "we still have a very serious potential mortgage crisis".
Reader views (18)
I have just checked again, 22 may @15.45 pound is 1.13 to the Euro and 1.58 to the dollar.
Two weeks ago I was in the Euro zone it was 1.05 so up 8 points. Again I ask, was this a raid over two hours or so based on areport by an agency who have suddenly realised there is a banking crisis.
It seems to me someone made some quick money, Us dollar will be next, it will recover. Chines economy in downturn. laying people off.
Funny how Govts are totally to blame, have we forgotten the banks already.
- Philbeal1, london
Keep on buying Gold. The clowns running things have as much idea about what is going on as my Garden Gnome.
- Corbo, Norwich England
I have just checked. The pound is at 1.14 Euro, and back at 1.58 for the dollar. So was this just a killing made by profiteers. Buy low price goes up again and sell all in one day.
IMF made favorable comments. Still not great but on track.
Not making any political point - just confused.
- Philbeal, london
Crash Gordon said all was fine with him.
- Jacqueline, Hampstead, London
Crash Gordon's achievements:
credit contraction, asset deflation, profit compression and employment destruction
Bring on the election
- Antonia H, Newcastle
I have always voted labour until Blair came, I thought he was a phoney, When Brown sold the gold and sat through unfettered immigration the alarm bells should have sounded. Prudence, about as prudent as my missus in a choclate shop. I knew that the labour party was full of Jock Commies and hiding under the Labour Banner, You look at their history Darling was (is) a trot Millibands check their father out,
- Robak, rock ferry uk
Talking of Tony Blair, when are we going to see his expense claims?
- Mikey, Guildford
My heartfelt thanks go to Tony Blair, Gordon Brown , the Labour party, but most importantly, all the Grade A fools that voted for them.
- Dave Davies, Basingstoke
I'm holding onto Canary Wharf car park tokens. They're a stable currency.
- Alan In Bow, London
Rubbish government. General election please.
- Ian, dartford
Agree with Den; bring on the election and lets be done with this bunch. Abolished 'boom and bust' - how does the man gather the corage and audacity to stand up and declare that he and his bunch of gravey train free loaders have a grip of this dire situation. Be gone and be done with it!
- Chicken Little, Essex
fan-bloody-tastic. Great going, McDarling and Crash ... It's always good to know what little I have left is worse than worthless ......
- Marianne, SW France/London
It wont be long till we get back to where labour last left us when they where in power. IMF bailout and income tax starting at 35% on anything over £600, rising up to 98% tax.
- Chris, Rochester
One sincerely hopes that our Great Leader and his Cabinet will read this - it's so difficult to understand what they mean when they address us. They talk of values and visions while scribbling out juvenile smears against the Opposition, of equality of opportunity while flying around first-class on 'fact-finding' trips, of transparency and integrity while hiding their expense chits under the bed. And that smasher - 'drawing a line under this matter and getting on with the important job of running the country and helping the hard-working British family.' But zilch competence when it comes to actually doing something - least of all about the economy.
- John Problem, Hackney Wick, London, UK
Bring on the election and a change of Government.
- Den, London
Another damning view of awful Labour's handling of our economy.
Bring on the election.
- Dave Davies, Basingstoke
Oops.
- Aaa, Town
Really high time to get rid of the Nu Labor imbecile show.
- Peteo, London NW1
