Sterling saw its biggest falls since the aftermath of June's Brexit vote on Thursday, while other major currencies most closely correlated with global growth rose after the Bank of England launched a series of steps to support the UK economy. As well as cutting rates to a record-low 0.25 percent from 0.5 percent, the BoE launched two new schemes, one to buy 10 billion pounds of high-grade corporate bonds and another - potentially worth up to 100 billion pounds - to ensure banks keep lending even after the cut in interest rates.
Sterling sank 1.5 percent against the dollar in the half hour after the decision and as BoE Governor Mark Carney started speaking. Dutch bank ING called the package of measures "sledgehammer stimulus". The Australian and New Zealand dollars, which have suffered in the past week from worries that central banks globally would not meet market expectations for further easing of policy, jumped by around half a percent against the US dollar.
"The Bank of England has hit a perfect 'High Five' at today's meeting, over-delivering against market expectations and bucking the recent trend of central banks disappointing," said Nick Gartside, a portfolio manager at J.P. Morgan Asset Management in London. Ahead of the decision, currency traders had worried that those betting against the pound looked exposed to the risk that the Bank would deliver only a cut in interest rates. "By extending the quantitative easing programme over the next 6 months, and the corporate bond buying programme over the next 18 months, the MPC has indicated that it expects to be in easing mode for a good while," said Mike Amey, Head of Sterling Portfolios at PIMCO.
"This has triggered new lows on UK gilt yields and pushed sterling down again. These moves are justified by what is certainly a comprehensive programme." Sterling money markets moved to price in further falls in the Bank's rates after it said in its statement that most of its policymakers were likely to back a cut to zero if economic data came in line with its forecasts in the months ahead.
Expectations that the Bank would have to move aggressively to stave off a shock to investment and growth after June's vote to leave the European Union has kept sterling under pressure. But it remains above 31-year lows around $1.28 hit a month ago. It had ground out gains against the dollar in two of the past three weeks. By 1151 GMT, the pound was down 1.4 percent at $1.3136. It lost 1.1 percent to 84.59 pence per euro.
The dollar, driven to a six-week low after a very poor reading of US second-quarter gross domestic product (GDP) last week, drew strength from the gains against sterling. The dollar index, which tracks the greenback against a basket of six major currencies, gained 0.3 percent to 95.832, holding above a low of 95.003 touched earlier this week. It was flat at 101.20 yen but 0.25 percent stronger against the euro at $1.1122.
The question after the BoE decision and some brighter ADP jobs numbers on Wednesday is whether US non-farm payrolls on Friday revive expectations for the Federal Reserve to raise interest rates later this year. US interest rate futures suggest investors now see just a 40 percent chance of a Fed rate hike by December.
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