The pound fell to a 31-month low against the dollar and a 16-month low against the euro on Monday morning.
The credit rating agency lowered Britain’s credit rating one notch from AAA to AA1, citing the deterioration in the government’s balance sheet and continued weakness in the growth outlook.
This is the first cut since the 1970s. Moody’s warned that growth would remain “sluggish”, and said that the government’s debt reduction programme faced “challenges.”
The business secretary Vince Cable dismissed the downgrade as "largely symbolic", while Labour has described it as a “humiliation” for the coalition.
"I think the prospect of the pound being weaker is actually very bad news for the economic recovery," said shadow chief secretary to the Treasury Rachel Reeves.
However, many traders have shrugged off the downgrade, saying the market was already largely prepared for a downgrade.
Andrew Wells, global chief investment officer for fixed income at Fidelity Worldwide Investment, said, “The UK’s downgrade from triple-A is very much priced-in and anticipated by professional investors. This is as a consequence of low or no economic growth and consistently high levels of debt. Challenging debt-to-GDP ratios are likely to see more events like this in 2013 from markets traditionally perceived as ‘high quality’.
“This was signalled by rating agencies last year through the negative outlooks they issued."
The economy grew in the third quarter of last year, but shrunk again by 0.3% in the last three months of 2012 and will enter a triple dip recession if there is a further drop in Q1 this year.
The pound has depreciated 5.8% this year, making it the second-worst performer according to Bloomberg's index of ten developed-market currencies. Only the yen has weakened more, losing 6.8%.