The pound has fallen to a record low against the dollar amid a renewed rush by investors to the US currency globally.
Sterling fell almost 5% early Monday to $1.0327, based on fresh 1985 lows seen on Friday after British Chancellor Kwasi Kwarteng unveiled the biggest tax cut program in 50 years .
The £45 billion package of tax cuts allowed the market to pass a verdict on the sustainability of public finances, given the extra demands it will place on borrowing.
The pound fell below its all-time low against the greenback, set in February 1985, of $1.054 in early Asian trade on Monday, fueling fears that parity was possible.
The most recent cost of living
It later settled around $1.06, still more than 2% below the previous session’s close and 6% below where it had been on Friday morning before the mini-budget.
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The government’s growth plan was clearly the catalyst for Friday’s drop, but traders said it had since intensified focus more broadly, as the dollar also rallied against a basket of other international currencies.
Joseph Capurso, Head of International Economics at the Commonwealth Bank of Australia. wrote: “The poor situation in the UK exacerbates the support for the USD, (which) may rise again this week.
“If a sense of crisis emerged over the world economy, the USD could jump significantly.”
The euro fell to fresh 20-year lows against the greenback amid growing recession fears linked to the war in Ukraine and in the wake of Italian elections that will see a far-right leader become the country’s new prime minister .
The Japanese yen took center stage among other currencies.
The problem for both the UK and Europe in general is that weak currencies raise dollar-denominated import costs, which could further fuel inflation.
The UK is also facing the continent’s goods becoming more expensive as its value has also fallen sharply against the euro, standing at €1.0948.
Naeem Aslam, chief market analyst at Avatrade, believed sterling would fall again in European business.
“The reality is that the cost of living crisis is going to get worse even if the currency has fallen so much.
“We believe that the GBP/USD pair could easily reach parity this week, if not in the next few days, given the current momentum we are experiencing in the market.
“In order to save the currency from a major disaster, the Bank of England is now likely to raise interest rates by a full percentage point, and it is quite possible that the Bank of England will do so in a way unprecedented.”
Both the chancellor and prime minister Liz Truss defended their program over the weekend, while shadow chancellor Rachel Reeves told Sky News on Monday it was clear a “credible plan for the public finances” was now needed to address market concerns.
In an interview with CNN on Sunday, Mrs Truss rejected comparisons with US President Joe Biden’s approach after saying he was “sick and tired of the trickle down economy”.
He said: “We all have to decide what the tax rates are in our own country, but my view is that we have to encourage growth at a very, very difficult time for the global economy.”
Asked if he was “recklessly increasing the deficit”, Ms Truss said: “I really don’t accept the premise of the question at all.”
Kwarteng suggested his announcements were just the start of the government’s agenda to revive Britain’s stagnant economy.
“We’ve only been here 19 days. I want to see, over the next year, people keep more of their income because I think it’s the British people who are going to drive this economy,” he told the BBC’s Sunday With Laura. Kuenssberg Program.
Read more: Mini-Budget: PM broke hoping to win big, but has he misjudged public mood? | Beth Rigby
Kwarteng is reportedly considering abolishing a charge for parents earning more than £50,000 who claim child benefit, increasing annual allowances for pension pots and a tax break for people who stay at home to care of their children or loved ones.
If sterling fell to parity with the US dollar, it could spark a rebellion among Tory MPs who could refuse to vote on the government’s finance bill or table letters of censure, the Daily reported Telegraph, citing supporters and critics of the prime minister.
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2:51 Truss and Kwarteng defend the plans
Asked if he was nervous about the fall in the pound, falling stock markets and the rising cost of government borrowing, Kwarteng said: “We need to have a much more frontal approach to growth and that it was about my statement on friday.
“I think if we get some of the reforms … if we get business back, we can get this country moving and grow our economy, and that’s my focus 100 percent.”
He declined to comment on market moves, saying: “I’ve been focused on the long and medium term, and I think it was absolutely necessary that we have a long-term growth plan.”