The pound fell to an all-time low of $1.035 against the US dollar today as markets opened into the weekend after Chancellor Kwasi Kwarteng’s mini-budget of tax cuts and fears of a UK recession lifted markets.
Gilts suffered their biggest sell-off in three decades on Friday and the pound plunged to its lowest this morning as investors thought planned tax cuts would stretch government spending to the limit.
Europe’s shared currency also touched fresh 20-year troughs against the dollar on fears of a recession as the energy crisis deepens into winter amid an escalation in the Ukraine war. A weekend election in Italy was also set to propel a right-wing coalition to a clear majority in parliament.
The dollar built on its recovery against the yen after last week’s currency intervention push by Japanese authorities, as investors returned their focus to the contrast between the Federal Reserve and the Bank of Japan’s insistence on sticking to massive stimulus.
Sterling fell as low as $1.0327, an all-time low, and last traded 3.34% weaker at $1.0490. It extended Friday’s 3.61% drop, after new finance minister Kwasi Kwarteng unveiled historic tax cuts financed by a massive increase in debt.
Chris Weston, head of research at Pepperstone, said: ‘Sterling is absolutely battered.
The pound fell to an all-time low of $1.035 against the US dollar before rising again
Chancellor of the Exchequer Kwasi Kwarteng during an appearance on the BBC
Millions of public sector workers face two years of pay pressure ahead of general elections due to rocketing inflation
Millions of public sector workers are facing two years of pay pressure ahead of the general election due to rocket inflation.
Liz Truss promised a spending review during the Tory leadership but has now scrapped that plan, despite the prospect that inflation could be in double digits in 2023.
This means real-term pay for public sector workers will be cut before 2024, the Times reported.
Britain has faced inflation of 22 percent this winter leaving millions unable to pay bills and businesses going to the wall.
Goldman Sachs predicts that inflation will double in 2023 as the price cap on energy bills continues to rise.
Chancellor Kwasi Kwarteng scrapped the top 45p rate of tax and cut 1p from the basic rate in the biggest package of British government tax cuts for half a century.
He’s also drawing up plans for new tax cuts to help families struggling with the cost of living.
‘Investors are looking for a response from the Bank of England. They’re saying it’s not sustainable, when you’ve got booming growth and double the deficit.’
The euro fell as low as $0.9528 and last traded down 0.55% at $0.9641.
The dollar added 0.29% to 143.78 yen, continuing its climb toward Thursday’s 24-year high of 145.90. It fell to 140.31 on the same day after Japanese authorities conducted yen-buying intervention for the first time since 1998.
A former top Japanese currency official said on Monday that policymakers would likely not try to defend a fixed level, such as the 145 mark, but simply conduct further operations to smooth volatility.
The dollar index was 0.76% higher at 114 and earlier touched 114.58 for the first time since May 2002.
Elsewhere, the risk-sensitive Australian dollar fell below $0.6487 for the first time since May 2020, before weakening 0.1% in last trade at $0.6524.
The allied commodity currency hit a fresh trough of C$1.3625 per greenback against the Canadian dollar, its weakest since July 2020.
China’s offshore yuan fell to a fresh low of 7.1630 per dollar, its weakest level since May 2020.
Other currencies were nursing losses. The Aussie touched $0.6510, its lowest since mid-2020. The yen was steady at 143.47, protecting it from losses for possible further intervention.
Japan intervened in the foreign exchange market on Thursday to buy the yen for the first time since 1998.
Oil and gold prices steadied after falling against a rising dollar last week. Gold prices hit more than two-year lows on Friday and bought $1,643 an ounce on Monday. Brent crude futures rose 71 cents to $86.86 a barrel.
It comes after the Bank of England on Thursday raised interest rates by another 0.5 percentage point to 2.25% and warned that the UK could already be in recession.
The central bank had previously projected that the economy would grow in the current financial quarter but now it believes that gross domestic product (GDP) will contract by 0.1 percent, meaning the economy will see two consecutive quarters of contraction – the technical definition of a recession.
Economists warned that the Chancellor’s tax-cutting ambitions could put further pressure on the pound, which also weighed on the strength of the US dollar.
Former Bank of England policymaker Martin Weill warned that the new government’s economic plans would ‘end in tears’ – with a run on the pound in an event similar to those recorded in 1976.
Economists at ING also warned on Friday that the pound could fall further to 1.10 against the dollar amid difficulties in the gilt market.
Chris Turner, global head of markets at ING, said: ‘Usually loose monetary and tight monetary policy is a positive mix for a currency – if it can be financed with confidence.
Prime Minister Liz Truss gives an interview to CNN
‘Here’s the rub – investors have doubts about the UK’s ability to fund this package, hence the underperformance of gilts.
‘With the Bank of England committed to reducing its gilt portfolio, the prospect of indigestion in the gilt market is a real one and one that should keep sterling weak.’
Derek Halpenny, head of research at MUFG, warned that the pound could fall further due to a ‘lack of credibility and concerns about external financing pressures as the budget and current account deficits combined are thought to be heading towards around 15% of GDP’.
Among international banks and research consultancies polled by Reuters last week, 55% said there was a high risk confidence in British assets would deteriorate sharply over the next three months.
Meanwhile, Bank of England policymaker Jonathan Haskell said the central bank was in a difficult position as the government’s expansionary fiscal policy appeared to put it at odds with the BoE’s efforts to cool inflation.
Economists have expressed concern over the huge amount of borrowing that would be needed to cover the hole in the government’s books.
The two-year moratorium on energy bills for households and businesses announced earlier this month could itself cost more than £150bn, while tax cuts could add another £50bn to the tab.
The respected IFS think-tank suggested it would be the biggest tax move since Nigel Lawson’s 1988 budget, when Liz Truss heroine Margaret Thatcher was prime minister.
The dangers of the UK’s £2.4 trillion debt mountain growing due to the Ukraine crisis have been underlined by the pound’s continued slide against the US dollar, which just hit a 37-year low of 1.11 this morning.
In August and September the 10-year yield on government gilts rose by the most since October and November 1979, underscoring market nervousness about the situation.
However, Ms. Truss and Mr. Kwarteng argue that increased economic activity can make up the difference, pointing to decades of weak productivity improvements.