The pound today hit an all-time low versus the US dollar of $1.0327, which is the lowest level since decimalization started in 1971.
With investors fearing that promised tax cuts may strain government finances to the breaking point, the pound fell to its lowest level this morning after Chancellor Kwasi Kwarteng’s mini-Budget on Friday.
Sterling recently traded 3.34% worse at $1.0490 after plunging as low as $1.0327, a record low. After the new finance minister Kwasi Kwarteng presented unprecedented tax cuts financed by significant increases in borrowing, it compounded Friday’s decline of 3.61%.
According to Polar Capital Fund Manager George Godber, “Some of it may be explained by sustained dollar strength,” he told the BBC.
But particularly, the pound’s movements are a response to the budget that was released on Friday.
This was intended to be a fiscal statement rather than a budget. There was a really haphazard approach taken to it; there was no procedure, no due diligence, no use of the OBR.
There are some genuinely alarming ones, therefore the Bank of England may need to drastically raise rates to safeguard consumers. In two years, rates might increase by a further 2%, reaching 5.5%.
As the oil crisis continues into the winter and the conflict in Ukraine intensifies, the euro also hit a new 20-year low against the dollar on simmering recession worries. A right-wing coalition was expected to gain a comfortable majority in parliament in Italy after a weekend election.
As investors switched their attention back to the difference between a hawkish Federal Reserve and the Bank of Japan’s determination on remaining with huge stimulus, the dollar strengthened its gains against the yen after the shock of last week’s currency intervention by Japanese authorities.
Chris Weston, director of research at Pepperstone, said that sterling was “certainly being battered.”
Investors are waiting for the Bank of England to respond. When you have twin deficits and declining growth, they claim that this is not sustainable.
The euro recently traded down 0.55% at $0.9641 after falling as low as $0.9528.
The value of the dollar increased by 0.29% to 143.78 yen, moving closer to Thursday’s 24-year high of 145.90. The same day, as Japan’s government engaged in yen-buying intervention for the first time since 1998, it fell to 140.31.
A former senior Japanese currency official predicted on Monday that officials will just carry out more operations to reduce volatility and not attempt to defend a certain level, such as the 145 level.
The dollar index increased by 0.76 percent to 114; previously, it had hit 114.58, its highest level since May 2002.
For the first time since May 2020, the risk-sensitive Australian dollar fell as low as $0.6487 in other currency trading. It last traded 0.1% worse at $0.6524.
The Canadian dollar, a fellow commodity currency, hit a new low against the US dollar at C$1.3625, its lowest level since July 2020.
The offshore yuan of China fell to a new low against the dollar of 7.1630, its lowest level since May 2020.
There were losses in other currencies. The Australian dollar fell to $0.6510, its lowest level since mid-2020. In order to prevent losses, the yen was held steady at 143.47 due to concerns about potential future intervention.
For the first time since 1998, Japan entered the foreign currency market on Thursday to purchase yen.
After falling last week against the strengthening dollar, oil and gold have stabilized. Gold prices on Monday were $1,643 per ounce after reaching a more than two-year low on Friday. Futures for Brent oil increased 71 cents to $86.86 a barrel.
It follows the Bank of England’s announcement on Thursday of a further 0.5 percentage point increase in interest rates to 2.25% while issuing a warning that the UK may already be in a recession.
Prior to this announcement, the central bank had predicted that the economy would expand in the current fiscal quarter. However, it now anticipates that Gross Domestic Product (GDP) will decline by 0.1%, which would mean that the economy would have experienced two quarters of decline, which is the technical definition of a recession.
Economic experts have previously warned that the Chancellor’s plans to slash taxes may put more pressure on the pound, which has already been affected by the US dollar’s rise.
Martin Weale, a former Bank of England policymaker, warned that the new Government’s economic policies would “end in tears” and result in a run on the pound, similar to the one that occurred in 1976.
Additionally, ING economists cautioned on Friday that challenges in the gilt market might cause the pound to drop as low as 1.10 versus the dollar.
According to Chris Turner, global head of markets at ING, a currency may benefit from a combination of looser fiscal and tighter monetary policy provided it can be funded with confidence.
The problem is that investors are skeptical about the UK’s capacity to finance this package, which explains the underperformance of gilts.
“Gilt market indigestion is a genuine possibility, and one that should keep sterling susceptible,” the Bank of England said in a statement. “The Bank of England is committed to lowering its gilt holdings.”
The pound may fall even lower due to measures that “lack credibility” and “raise worries about external financing pressures since the budget and current account deficit combined seems to be going to roughly 15% of GDP,” according to Derek Halpenny, head of research at MUFG.
In a survey conducted by Reuters last week of foreign banks and research consultancies, 55% of respondents said there was a strong danger that trust in British assets would decline significantly over the next three months.
Jonathan Haskel, a Bank of England policymaker, said that the institution was in a difficult situation since the government’s expansionary fiscal policy looked to conflict with the BoE’s attempts to reduce inflation.
The significant borrowing that would be needed to close the shortfall in the government’s finances has alarmed economists.
The two-year freeze on energy prices announced earlier this month for homes and companies may cost more than £150 billion on its own, and the tax cuts might add a further £50 billion to the bill.
According to the reputable IFS think tank, it would be the largest tax change since Nigel Lawson’s 1988 Budget, when Liz Truss’s idol Margaret Thatcher served as Prime Minister.
The continued decline in the value of the British pound relative to the US dollar—which this morning hit a new 37-year low of just 1.11—has highlighted the risks of adding to the UK’s £2.4 trillion pile of debt as the Ukraine crisis drives up inflation.
The 10-year yield on government gilts has experienced the greatest rise so far in August and September since October and November 1979, highlighting the markets’ apprehension about the situation.
Ms. Truss and Mr. Kwarteng, citing decades of mediocre productivity increases, contend that increasing economic activity may make up the gap.