The consequences of the abrupt fall of the pound against the dollar

The pound has been sliding meekly down against the dollar for years, but the sharp 5% drop seen on Monday has set off alarm bells in a country on the verge of recession.

The British currency registered its biggest drop in a single day in Asian markets since March 2020, when the covid-19 pandemic began.

It hit a record low of $1.0327, its lowest level since 1972.

The opening of European stock markets brought some calm hours later, but the panic among investors seems to make it clear that the policies of the new Prime Minister Lizz Trust worry the markets.

Analysts agree the slump is in reaction to the UK’s biggest tax cuts in 50 years unveiled on Friday by Chancellor of the Exchequer Kwasi Kwarteng.

The measures stoked concerns that this cut would make it difficult for the government to stabilize public finances and could cause inflation and public debt to skyrocket.

“The timing of these tax cuts could not have been worse, as they conflict with the objectives of the central bank, which is trying to contain inflation” at 9.9%, says Azad Zangana, senior economist at Schroders.

“These cuts are likely to lead to higher inflation and higher interest rates.”

“The immediate costs to consumers could be significant,” explains Ben Laidler, global markets strategist at the eToro trading platform.

If the pound remains at this low level against the dollar, imports of dollar-priced commodities, including oil and gas, will become more expensive.

This effect can already be seen not only in the UK, but in any economy that has seen its currency depreciate.

Buying a barrel of oil on international markets is now more expensive given the strength of the dollar.

And hence the prices of gasoline at the pumps have only increased.

The 3.5% drop in sterling on Friday alone “would add 5 pence to the average cost of 1.65 pounds per liter of petrol ($1.80), as well as increase the price of other imports,” explains Ben Laidler. , global markets strategist for the eToro investment platform.

Imported goods could also become considerably more expensive, further boosting inflation, which is already at its highest level in decades.

Tech products like iPhones that are made abroad could also go up in price, as could things made in the country but with parts bought from abroad.

Another direct impact on household pockets is that rising interest rates make mortgages more expensive.

Some have seen the pound’s slide as a warning to governments trying to implement similar tax cuts.

“Other countries, from China to Japan, have stepped in in recent days to try to stem the weakening of their currencies,” says Laidler.

“But the UK is in a more difficult situation, with higher inflation, much lower foreign exchange reserves and fiscal policy that is now pulling in the opposite direction,” he adds.

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