British pound plunges to record lows against the dollar

( Business) — The British pound fell to a record low against the US dollar on Monday due to growing fears about the stability of UK government finances.

The nearly 5% drop to just over $1.03 came during trading in Asia and Australia on Monday and extended a 3.6% drop from Friday, prompting predictions the pound could fall. at parity with the US dollar. It rallied slightly as European traders came online, rising back to $1.07.

The fall of the currency It follows British Chancellor of the Exchequer Kwasi Kwarteng’s announcement on Friday that the UK would implement the biggest tax cuts in 50 years while increasing government borrowing and spending.

The new tax-cutting fiscal measures, which include scrapping plans for a rise in corporate tax and lowering the top rate of income tax, have been criticized as “trickle economy” by the opposition Party. Labor Party and even criticized by members of the minister’s own Conservative Party.

Kwarteng doubled down over the weekend, hinting in television interviews Sunday that more tax cuts are to come, and said Friday’s measures were “just the beginning” as the government tries its best to grow.

Former Conservative Chancellor Lord Ken Clarke criticized the tax cuts on Sunday, saying they could lead to the collapse of the pound.

“I’m afraid that’s the kind of thing that is generally tried in Latin American countries without success,” Clarke said in an interview with BBC radio.

The pound has been hit by a string of weak economic data, but also by the sharp rise in the US dollar, a safe-haven investment that sees inflows in times of uncertainty.

The euro also hit its lowest level in 20 years after Giorgia Meloni claimed victory in the Italian general election. Investors are monitoring what would be the most far-right government since Benito Mussolini’s fascist era, raising concerns about cohesion within the European Union.

But the pound is suffering more than most from the economic outlook in the UK, which faces the highest inflation among G7 nations, and the government’s huge fiscal gamble on growth. It has lost almost 21% so far this year, against a 15% drop in 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.

“If there was an escalation of the war in Ukraine … we would see a sharp decline in both the pound and the euro,” said Clifford Bennett, chief economist at ACY Securities, an Australian brokerage firm.

“One should not underestimate the crisis that is going through all of Europe at the moment and the pound is more vulnerable than most,” he said.

Asian Markets and Currencies Crack

The rise in the US dollar also caused major Asian currencies to fall on Monday.

China’s yuan fell 0.5% on land 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’ forward foreign exchange sales to customers, starting Wednesday. That should make it more expensive to buy foreign currency 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, the Japanese central bank intervened in the foreign exchange market for the first time since 1998 to support the yen when it hit 145. The yen rallied slightly after the intervention, but soon resumed sliding.

Asian stock markets were also turbulent on Monday, after US stocks sold off on Friday as fears of a recession grew.

South Korea’s Kospi fell 2.7%, Japan’s Nikkei 225 fell 2.4% and Australia’s S&P/ASX 200 fell 1.4%. China’s Shanghai Composite Index fell 0.1%.

“Risk sentiment has been hit hard by the Federal Reserve’s latest policy action and guidance,” DBS analysts said in a report on Monday.

The Federal Reserve on Wednesday approved a third straight 75 basis point hike in an aggressive move to tackle sizzling inflation that has been weighing on the US economy.

Even without Fed action, Europe faces a recession due to the war in Ukraine, and China is seeing “substantially weak growth dynamics” due to domestic factors, the DBS analysts said.

“Add on top of that a sharp drop in US dollar liquidity and sharply higher US interest rates, the global economic outlook looks particularly precarious,” they added.