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Sterling plunges to lowest level against the US dollar since 1985

Business Sep 8, 2022 at 09:59

Sterling plunges to lowest level against the US dollar since 1985

Investors dump British assets amid concerns that tax cuts and increased public spending under a new government could make the UK’s economic situation even worse.

The British pound has hit its lowest level against the US dollar in almost four decades.

Just after 2pm on Wednesday, sterling fell to $1.1407, according to Refinitiv data – its lowest point since 1985.

The pound has lost more than 15% against the dollar so far this year, hurt by both the dollar’s strength and the gloomy economic outlook for the UK.

UK inflation was already the highest of the G7 economies, and a recession has been forecast by analysts for months.

But now Liz Truss has replaced Boris Johnson as prime minister, vowing to help people cope with rapidly rising energy bills but at the same time making it clear she wants to cut taxes.

She has also ruled out extending a windfall tax on oil and gas companies, leaving little option apart from increasing government borrowing to fund her promise.

The pound’s dire performance will also make the Bank of England more likely to hike interest rates when its monetary policy committee meets next week.

The bank has been rising rates in an effort to calm inflation – which hit 10.1% in July, the latest figures available – but a struggling dollar will increase the cost of imports, fuelling inflation.

Sterling’s all-time low against the dollar was $1.0545 in March 1985, just before the Plaza Accord, when action was taken by some of the world’s biggest economies to rein in the Reagan-era superdollar.

Meanwhile, on Wednesday, the pound was also down almost 1% against the euro, at 86.83, although over the year it has performed better against the single currency than against the US dollar.