Pound sinks to record low against the dollar as chancellor and prime minister defend mini-budget
Sterling’s decline continued as trading opened in Asia and Australia on Monday – fuelling fears the currency could plunge to parity with the US dollar by the end of the year.
The pound has fallen to a record low against the dollar amid a fresh investor rush towards the US currency globally.
Sterling slipped by nearly 5% early on Monday to $1.0327 – building on fresh 1985 lows seen on Friday after UK chancellor Kwasi Kwarteng unveiled the biggest programme of tax cuts for 50 years.
The £45bn tax-slashing package saw the market deliver a verdict on whether the public finances would be sustainable.
The pound plunged below its all-time low against the greenback – set in February 1985 – of $1.054 early on Monday in Asian trading, fuelling fears that parity was even possible.
It later stabilised around $1.06 – still over 2% below the previous session’s close and 6% down on where it had stood early on Friday morning before the mini-budget.
The government’s growth plan was clearly the catalyst for Friday’s plunge but traders said it had since intensified the focus more widely as the dollar also shot up against a basket of other international currencies.
Joseph Capurso, head of international economics at Commonwealth Bank of Australia. wrote: “The poor situation in the UK exacerbates support for the USD, (which) can track higher again this week.
“If a sense of crisis about the world economy were to emerge, the USD could jump significantly.”
The euro fell to fresh 20-year lows versus the greenback amid growing recession fears linked to the war in Ukraine and in the wake of Italy’s elections that will see a far-right leader become the country’s new PM.
The Japanese yen was among other currencies in focus.
The trouble for both the UK and Europe more generally is that weak currencies raise dollar denominated import costs, potentially fuelling inflation further.
The UK also faces goods from the continent becoming more expensive because its value has also slipped sharply versus the euro – standing at €1.0948.
Naeem Aslam, chief market analyst at Avatrade, believed sterling would fall back again in European dealing.
“The reality is that the cost of living crisis is going to become even worse as the currency has fallen this much.
“We believe that the GBP/USD pair could easily reach parity this week, if not in the coming days, given the current momentum that we are experiencing in the market.
“In order to save the currency from a huge disaster, the Bank of England is now likely to increase the interest rate by a full percentage point, and it is highly possible that the Bank of England does this in an unprecedented fashion.
Both the chancellor and Prime Minister Liz Truss defended their programme.
In an interview with CNN on Sunday, Ms Truss rejected comparisons with US President Joe Biden’s approach after he said he was “sick and tired of trickle-down economics”.
She said: “We all need to decide what the tax rates are in our own country, but my view is we absolutely need to be incentivising growth at what is a very, very difficult time for the global economy.”
Asked whether she was “recklessly running up the deficit,” Ms Truss said: “I don’t really accept the premise of the question at all.”
Mr Kwarteng suggested his announcements were just the beginning of the government’s agenda to revive the UK’s stagnant economy.
“We’ve only been here 19 days. I want to see, over the next year, people retain more of their income because I believe that it’s the British people that are going to drive this economy,” he told the BBC’s Sunday With Laura Kuenssberg programme.
Mr Kwarteng is reportedly considering abolishing a charge for parents who earn more than £50,000 and claim child benefit, increasing the annual allowances on pension pots and a tax break for people who stay at home to care for children or loved ones.
If sterling fell to parity with the US dollar, it could trigger a rebellion among Tory backbenchers who could refuse to vote for the government’s finance bill or submit letters of no confidence, the Daily Telegraph reported, citing backers and critics of the prime minister.
Asked whether he was nervous about the dropping pound, falling stock markets and rising cost of government borrowing, Mr Kwarteng said: “We’ve got to have a much more front-footed approach to growth and that’s what my Friday statement was all about.
“I think that if we can get some of the reforms… if we get business back on its feet, we can get this country moving and we can grow our economy, and that’s what my focus is 100% about.”
He refused to comment on market movements, saying: “I’ve been focused on the longer term and the medium term, and I think it was absolutely necessary that we had a long-term growth plan.”