NEW YORK: The British pound hit an all-time low against the dollar on Monday amid investor concerns that Britain’s new economic plan will pummel UK finances, while the Bank of England said it was watching financial markets “very closely” following sharp moves in asset prices.
The dollar, helped by sterling’s decline and a fresh 20-year low for the euro, hit a two-decade high against a basket of six peer currencies.
In Japan, authorities reiterated that they stood ready to respond to speculative currency moves, after they intervened last week to bolster the yen for the first time since 1998.
Sterling’s slide, having already plunged 3.6% on Friday following the unveiling of new Finance Minister Kwasi Kwarteng’s historic tax cuts, funded by the biggest increase in borrowing since 1972, rippled across markets with the currency falling as much as 4.9% to an all-time low of $1.0327.
“UK markets are blowing up again in the wake of the Truss administration’s tone-deaf fiscal largesse that was delivered on Friday into a bond market that loathes any steps that fan inflation risk and higher debt issuance,” said Derek Holt, head of capital markets economics at Scotiabank.
“How could the admin and its political wonks have so seriously misjudged the reaction to spending hundreds of billions of pounds,” he said.
The pound largely recovered from its overnight drop during the London session as traders speculated the BoE might take emergency action to stem the currency’s fall, but tumbled again after BoE Governor Andrew Bailey said the central bank was watching the markets, but did not signal any immediate action.
Sterling was last down 1.64% at $1.0675.
Kwarteng on Sunday dismissed the currency’s freefall, saying he was focused more on longer-term growth, and even hinted there were more tax cuts to come.
“The market’s reactions show that investors have lost confidence in the government’s approach, creating a level of volatility that puts the pound on par with some emerging market peers,” said Fiona Cincotta, senior financial markets analyst at City Index.
“There is a good chance that the BoE will now be forced to hike rates aggressively in the coming November meeting if an emergency intervention isn’t made before,” she said.
The euro also touched a fresh 20-year bottom at $0.9528 and was last down 0.83%.
At 12:05 p.m. Eastern time (1605 GMT), the dollar was up 0.875% at 114.11 against a basket of peer currencies, having earlier touched 114.58, it strongest since May 2002.
“The focus is on sterling but the story on the dollar is far wider and that is the part that is not helping,” said Seema Shah, chief strategist at Principal Global Investors.
The dollar firmed 0.8% to 144.535 yen, heading back toward Thursday’s 24-year peak of 145.90. It sank to around 140.31 that same day after Japan conducted yen-buying intervention for the first time in more than 20 years.
Japan is estimated to have spent about $25 billion in that dollar-selling, yen-buying intervention, according to estimates by Tokyo money market brokerage firms.
China’s offshore yuan slid to a new low of 7.1728 per dollar, its weakest since May 2020. Onshore, the yuan also touched a 28-month trough of 7.1690.
The fresh lows came even as the central bank said it will reinstate foreign exchange risk reserves for some forward contracts, a move that would make betting against the yuan more expensive and slow the pace of its recent depreciation.
The risk-sensitive Australian dollar dropped 1.2% to $0.6452, its lowest since May 2020.
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