Page last updated at 16:04 GMT, Wednesday, 22 April 2009 17:04 UK

Pound hit as debt burden to soar

Pound coin rests on dollar notes

The pound has fallen against the dollar and the euro after Chancellor Alistair Darling forecast a massive increase in UK public debt.

In his Budget speech, Mr Darling said that debt would increase to 68% of the UK's economic output next year.

Analysts said the rise had triggered concerns about whether investors would be as willing to buy UK bonds.

Sterling fell to $1.4440, its lowest level since early April. It also fell against the euro to 1.1127 euros.

Government bond prices also fell.

BUDGET 2009

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Sales of government debt this year are forecast to be £220bn, above all market forecasts, and analysts questioned whether investor appetite for the bonds would be strong enough.

"The foreign exchange market is worried about the debt market's ability to absorb the amount of issuance for the next year," said Russell Bloom, an analyst at Action Economics.

"A lack of interest could see speculation of IMF aid rear its head again. I think this is the fear that is being priced into the market," he added.

Geoffrey Yu, a currency strategist at financial services firm UBS, said that he would pay close attention to what credit rating agencies say about the UK's increased debt burden.

"Any whiff that they will have to review the UK's ratings because of this, then you're going to see a wave of sterling selling. That's the risk right now," he told the Reuters news agency.

News of a higher tax rate for high earners also undermined the pound amid fears it would trigger a "brain drain" of talent and funds abroad.

Last week, the pound rose above $1.50 for the first time since mid-January on hopes that the UK housing market could be recovering.



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