The British pound plunged to new depths, sliding towards three-year lows against the US dollar after Moody’s became the first major ratings agency to strip Britain of its triple-A credit rating. Although the decision was widely expected, it comes at a painful time for sterling ahead of US budget deadline and Bank of England meetings, both of which could lead to further gains for the US currency.

The euro has also climbed to record highs against the under-fire British pound despite investors feeling anxious about Italian election results. The single currency is hovering close to six-week lows versus the US dollar though and may decline further if voters split the next Italian government which would cloud the nation’s debt outlook.

Sterling

The British pound suffered another crushing blow, plunging to fresh two-and-a-half-year lows against the US dollar after Moody’s became the first major ratings agency to slash Britain’s coveted triple-A rating. Moody’s cut the UK rating by one notch from AAA to AA1, but moved Britain’s outlook to stable, which suggests no further downgrades are likely over the next two years. Although expected, given the country’s precarious growth outlook and rising debt levels, the pound slumped to new record lows and may continue to suffer in the days ahead with the decision perhaps coming a lot sooner than anticipated.

US dollar

The US dollar climbed to six-week highs against the euro, catching a safe haven bid in front of Italian election results. A safety-first approach to trading may build ahead of Washington’s March 1 deadline. However, chairman of the Federal Reserve, Ben Bernanke, will testify in front of lawmakers which could unsettle the US dollar. A dovish sounding Bernanke could weigh on the US currency, while confidence about US and global growth should encourage investors to lean back towards the greenback’s more risky rivals.

Euro

Euro strength began to unravel despite another batch of solid German economic data on evidence that the worst may not be over for Europe in terms of its economic recession and government debt risks. The euro fell to six-week lows against its US counterpart ahead of elections in Italy after PMI surveys showed business in manufacturing and services in the euro area shrank by more than expected in February.

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