Sterling fell 4.7 percent against the dollar to $1,035, hitting a record low in Asian trading on Monday after British Finance Minister Kwasi Quarting pledged to pursue further tax cuts.
sharp moving in Sterling pound This came early in the Asian trading session, as lower volumes in the GBP/USD pair could exacerbate volatility. The pound also fell 3.7 percent against the euro to 1.0787 euros, hitting its lowest level since September 2020.
The decline against the single currency highlighted how the recent decline in the pound reflects not only broad strength in the dollar, but concern about it British economy.
Kwarteng on Friday Unveiled £45 billion A debt-financed package containing the largest set of tax cuts in half a century. UK government bonds sold off sharply, with the 10-year Treasury yield rising 0.27 percentage point on the sell-off, reaching 3.77 per cent.
The tax cuts come as the UK is already expected to spend £150 billion on subsidizing energy costs for consumers and businesses. Much of this borrowing will be financed through gold bonds.
Unlike the big tax cuts of the 1980sKwarteng is borrowing tens of billions of pounds to fund his plans, boosting demand as the Bank of England raises interest rates to control inflation.
“We seem to be headed toward a downward spiral that we normally see in emerging market crises, as policy makers struggle to reassert their credibility,” said Mansoor Mohieldin, chief economist at Bank of Singapore.
Muhyiddin said investor confidence in the pound has been undermined by expectations that UK public debt is now on an “unsustainable upward trajectory” while the country continues to run “large current account deficits”.
“If we continue to see these huge market moves, the Bank of England will have to raise interest rates, perhaps as much as one percentage point, to try to stabilize the pound,” he added.
Bank of England raise interest rates by 0.5 percentage point on Thursday, following a 0.75 percentage point increase in a row for the third time in a row by the US Federal Reserve last week.
“We have argued that the way forward for sterling will depend largely on the monetary response to near-term inflation and well-targeted fiscal measures, but so far delivery has been less than encouraging on both fronts,” said FX analysts. Wall Street Bank Goldman Sachs.
“With massive unfunded spending on the fiscal side unmatched by monetary policy to offset the inflationary impulse, the currency is likely to weaken further.”
Traders and analysts in Asia said lower volumes in the region likely exacerbated downward pressure on the Pound.
“It is unusual to see Asian markets setting the tone for this, as this region is usually a price enthusiast rather than a maker,” said Benjamin Chatel, FX strategist at JPMorgan. “I suspect we see the relatively low liquidity in these Asian markets at play here, with the fundamentals exacerbated by those liquidity dynamics.”
Additional reporting by Adam Samson In New York and Leo Lewis in Tokyo