* Euro drops vs sterling, negative rates discussed at ECB
* Little reaction to BoE rate hold
* Fitch warns on UK's triple-A rating
By Philip Baillie
LONDON, Dec 6 Sterling gained against the euro
on Thursday after ECB chief Mario Draghi painted a grim picture
of the euro zone economy and said policymakers had discussed
negative deposit rates, weakening the common currency.
The euro fell to a session low of 80.66 pence
after Draghi's comments, its largest daily drop against the
pound in six weeks. It could see further losses after the
European Central Bank revised down its euro zone growth
expectations, with a near-term target seen at its 200-day moving
average of around 80.60 pence.
The outlook for UK economy has also darkened but
the Bank of England left interest rates at 0.5 percent on
Thursday and kept its quantitative easing programme unchanged as
The euro's losses picked up after the ECB's Draghi said the
bank had discussed negative deposit rates, or the rate the ECB
pays commercial banks to park excess funds, at its meeting but
gave little details.
Cutting the deposit rate would make the euro more attractive
as the currency for carry trades, where investors sell a
low-interest-bearing currency to buy a higher-yielding one such
as the Australian dollar.
"Clearly talk of negative interest rates revived the idea
that they may go where no central bank has gone before and that
had an impact on market sentiment," said Simon Derrick, head of
currency research at BNY Mellon.
"It doesn't mean that is what they are going to do but it
suggests that there is an active discussion about something
which people hadn't previously taken into account."
But Derrick said a downward revision in euro zone growth
forecasts was in line with previous revisions, and was not a
major surprise to the market.
"It is a pretty lousy day for the euro," he added.
The pound fell 0.1 percent against the dollar to
$1.6085, off a one-month high of $1.6131 hit on Tuesday.
Investors are worried that a grim euro zone outlook will hurt
the pound, given the UK's strong trade links with the euro zone.
Earlier, data showed Britain's trade deficit widened more
than expected in October.
Analysts said the pound's gains against the dollar could
prove temporary after rating agency Fitch said Britain's
credibility had been damaged after finance minister George
Osborne said he would not meet a key debt reduction target.
"Fitch and Moody's have had (UK) gilts on negative outlook
for a while so it is no surprise," said Geoffrey Yu, currency
strategist at UBS. "If one of them downgrades the UK's triple-A
status that probably not be the end of the world, but if it was
two that might see some forced selling."
Fitch has a negative outlook on Britain's AAA rating and has
said it will review it again after Osborne's 2013 budget
statement early next year.
"The triple-A rating is everything. It is what has supported
sterling from selling off over the last few years and if that
were to go you would see gilt yields rising and sterling
dropping like a stone," said Christian Lawrence, currency
strategist at Rabobank.
The pound is also seen as a safe haven while the debt
persists in the euro zone, analysts noted.
Citibank told clients in a note it expects the UK to
maintain its triple-A status, given Osborne's deficit-busting
programme is a credible solution.
"The Coalition government seems on course to deliver fiscal
austerity comparable to the measures we see elsewhere in
Europe," Citi said in a note. "As a result, sterling should
continue to serve as a safe haven proxy for the euro.