Pound hit over hung parliament fears

(Peter Macdiarmid/Getty Images)

The pound was punished today amid worries that plans to slash the UK's soaring deficit could be delayed by political uncertainty.

Fears of a hung parliament after the looming general election have been fuelled by a narrowing Conservative poll lead and sent sterling to a nine-month low of 1.478 against the dollar at one point.

The pound was also on the back foot against the euro, falling as low as 1.09 before clawing back some ground against both currencies.

"If there is one thing markets hate it is uncertainty, and the prospect of a hung parliament could keep sterling on the defensive until the general election is done and dusted," Capital Economics' John Higgins said.

The pressure on the pound comes as markets look for a decisive general election result and a clear plan to sort out the UK's dire public finances without delay.

The second successive monthly drop in mortgage approvals during January also cast doubts over the strength of the recovery and signalled that rate hikes could be a long way off.

Meanwhile, comments from several members of the Bank of England's rate-setting committee that more quantitative easing - creating electronic money - could be needed have also weighed on the currency.

Mark O'Sullivan, director of dealing at foreign exchange firm Currencies Direct, said: "The market has been running out of patience with sterling, and it has been brewing for a while."

Sterling has lost more than 10 cents against the dollar during the past month - hitting holidaymakers in the pocket, putting upward pressure on petrol pump prices and adding to import costs for businesses.

The plummet from 1.52 to below 1.48 was the pound's biggest one-day fall since January last year, according to analysts at ING Commercial Banking. Sterling hit a 24-year low of 1.35 dollars last year in the worst depths of the recession.

ING currencies analyst Tom Levinson said: "Despite protestations to the contrary, the UK is struggling to avoid comparisons to Greece and fears of a debt downgrade are stalking the pound.

"Ratings agencies seem to be waiting for a new budget from the next UK government before making their move, but it is hard to completely rule out the UK losing its AAA rating from at least one of the ratings agencies."