Page last updated at 18:48 GMT, Friday, 5 June 2009 19:48 UK

Pound slides on political turmoil

5, 10 and 20 note

The pound has fallen against the dollar and euro, hit by uncertainty over the UK's political situation after several ministers resigned from the cabinet.

The pound slid against the dollar to $1.5959, a one-week low, but recovered to $1.5993. Sterling hit a two-week low against the euro of 1.1277 euros.

On Wednesday, the pound had hit a seven-month high of almost $1.67.

Results in so far from local elections have also shown poor results for the Labour Party.

"The UK political situation is rapidly moving from bad to worse which is acting as a major drag on the pound despite more encouraging housing news," said French financial services firm Calyon in a note to clients.

Sterling had been riding high in recent weeks on hopes that the worst was over for the UK economy.

'Difficult circumstances'

Investors think there is a risk that the UK could see a leadership vacuum at a fragile time for the economy.

The limited scope for plausible economic policy shifts in the UK will remain unchanged irrespective of whose hands are grasping the levers of power
Neil Mellor, Bank of New York Mellon

However, news that Alistair Darling would remain in his job as chancellor was largely welcomed in financial circles.

"It is not really the time to be changing the chancellor," said Howard Archer, an economist at IHS Global Insight.

"Obviously, Darling has had his problems, but he has had to face very difficult circumstances. There has been a lot of criticism, but he has not done that bad a job," he added.

And the EEF, the manufacturers' organisation, also welcomed the announcement that Lord Mandelson would remain as business secretary, as well as Mr Darling's continued role at the Treasury.

"The economic storm has not yet passed and manufacturers need to see the government focusing all its attention on supporting businesses through these turbulent times and into the upturn," said the EEF's director of policy, Steve Radley.

Impact short-lived?

Some analysts said the impact on sterling from the UK's political woes was likely to be short-lived.

"The limited scope for plausible economic policy shifts in the UK will remain unchanged irrespective of whose hands are grasping the levers of power," said Neil Mellor, a currency strategist at Bank of New York Mellon.

"The burgeoning fiscal deficit in the UK is a problem that crosses party lines and one that would invite political disaster should it be tackled prematurely," he added.

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