Sterling fell sharply today after Bank of England Governor Mervyn King labeled the UK economic recovery "fragile".
Speaking to the Treasury Committee following this month's inflation report, King said the UK faces many challenges, including reducing the country's largest peace-time deficit.
After King's comments, sterling lost ground to $1.545 against the dollar, while the pound dipped to 88.28p against the euro.
The Governor said bank lending to non-financial sectors continues to decline and the global imbalances which sparked the financial crisis have not been resolved.
Although there are merits in additional quantitative easing to stimulate the economy, the measure also brings significant risks, King added.
With Britain's budget deficit expected to hit a record high above 12% this year, opposition politicians have raised fears the nation could lose its AAA status.
However, King refuted suggestions Britain is in danger of a sovereign credit downgrade.
King said: "I do not believe the rating agencies are concerned, in the sense that they are not re-rating the UK and I would be very surprised if they were to do so."
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