The nearly 5% drop to just above $1.03 came during trading in Asia and Australia on Monday and extended a 3.6% drop from Friday, spurring predictions that the pound could fall to parity with the US dollar. It recovered slightly as European traders tuned in, climbing back to $1.07.
The drop in the currency follows UK Chancellor of the Exchequer Kwasi Kwarteng’s announcement on Friday that Britain would implement the biggest tax cut in 50 years while increasing government borrowing and spending.
The new tax-cutting measures, which include scrapping plans to raise corporation tax and cutting the top rate of income tax, have been criticized as “trickle-down economics” by the opposition Labor Party and even criticized by members of the chancellor. conservative party itself.
Kwarteng doubled down over the weekend, hinting in television interviews on Sunday that more tax cuts are coming, saying Friday’s measures were “just the beginning” as the government does everything it can to grow.
Former Tory chancellor Lord Ken Clarke criticized the tax cuts on Sunday, saying they could cause the pound to collapse.
“I’m afraid it’s the sort of thing that tends to be tried in Latin American countries without success,” Clarke said in an interview on BBC radio.
The pound has been hit by a series of weak economic data, but also by the strong rise in the US dollar, a safe haven investment that sees inflows in times of uncertainty.
The euro also hit a 20-year low after Giorgia Meloni claimed victory in a general election in Italy. Investors are eyeing what would be the most far-right government since Benito Mussolini’s fascist era, which has raised concerns about cohesion within the European Union.
But the pound is suffering more than most because of the economic outlook for the UK, which faces the highest inflation among the G7 nations, and the government’s huge fiscal push for growth. It has lost nearly 21% so far this year, compared with a 15% drop for the euro.
The previous all-time low for the British pound against the US dollar was 37 years ago on February 25, 1985, when 1 pound was worth just over $1.05.
“Should there be any escalation of the war in Ukraine … we will see a sharper decline in both the pound and the euro,” said Clifford Bennett, chief economist at ACY Securities, a Australian brokerage.
“You should not underestimate the crisis that the whole of Europe is in at the moment and the pound is more vulnerable than most,” he said.
Asian markets and currencies are cracking
The rise in the US dollar also sent major Asian currencies lower on Monday.
China’s yuan fell 0.5% in the onshore market to the lowest level in more than 28 months. The offshore yuan fell 0.4%.
The rapid declines prompted the People’s Bank of China to impose a 20% risk reserve requirement on banks’ foreign currency forward sales to clients, starting on Wednesday. This should make it more expensive to buy foreign currencies through derivatives, which could slow the pace of the yuan’s decline.
Elsewhere in the region, the Japanese yen fell 0.6% against the dollar to 144. Last Thursday, Japan’s central bank intervened in the foreign exchange market for the first time since 1998 to prop up the yen as it reached to 145. The yen rebounded slightly after the intervention, but soon resumed its fall. Asian stock markets were also in turmoil on Monday, after US stocks sold off on Friday as fears of a recession grew. South Korea’s Kospi ( KOSPI ) was down 2.7%, Japan’s Nikkei 225 (N225) was down 2.4% and Australia’s S&P/ASX 200 was down 1.4%. China’s Shanghai Composite Index (SHCOMP) fell 0.1%.
“Risk sentiments have taken a big hit from the Fed’s latest action and policy guidance,” DBS analysts said in a research note on Monday.
The Federal Reserve on Wednesday approved a third straight hike of 75 basis points in an aggressive move to tackle the red-hot inflation that has been plaguing the US economy.
Even without Fed action, Europe is facing a recession due to the war in Ukraine, and China is looking for “substantially weak growth dynamics” due to domestic factors, analysts at DBS.
“Add to that a sharp decline in US dollar liquidity and much higher US interest rates, the global economic outlook looks particularly precarious,” they added.
Correction: An earlier version of this story misstated the fall in the pound on Friday.