The pound has slumped since Britain’s new finance minister, Kwasi Kwarteng, unveiled his mini-budget to cut taxes on Friday – Copyright UK PARLIAMENT/AFP JESSICA TAYLOR
The pound hit a record low against the dollar on Monday on growing fears over Britain’s economy after the government unveiled a huge tax cut budget.
The selloff came as most Asian stock markets fell again on growing expectations that central bank interest rate hikes to fight runaway inflation would lead to deep recessions and painful.
Officials in several countries, including the United States, Britain, Switzerland and Sweden, unveiled further increases in the cost of borrowing.
The moves plunged stock markets into the red again after officials reiterated their focus on fighting inflation, even if that means provoking a recession.
But the week’s biggest casualty was the pound, which fell below $1.10 for the first time since 1985 when new finance minister Kwasi Kwarteng announced his controversial mini-budget.
He then extended losses Monday to an all-time low of $1.0350 in Asian trade after saying he intended to unveil further cuts, despite his budget causing turmoil in London markets.
It also fell to a two-year low against the euro, although the single currency remains under pressure against the dollar, standing at 2002 levels.
Now observers are warning that the pound could fall to par with the greenback.
Kwarteng, who was set up by Liz Truss after she became prime minister earlier this month, said he planned to cut taxes to revive Britain’s economy and provide cash to protect families of soaring energy costs.
But investors have been spooked by the huge amount of borrowing likely needed for the multi-billion pound package, which critics say would benefit the wealthy far more during a cost of living crisis.
“Whether or not the UK government’s announcement of the biggest tax cut since 1972…will deliver a meaningful growth dividend is not yet something markets are ready to consider,” said Ray Attrill of the National Australia Bank.
“Instead, they were concerned about the scale of the UK government’s short-term funding needs, at a time when the current account deficit stands at over 8% of GDP.”
He added: “Discussions over a possible downgrade in the UK’s sovereign rating have already begun.”
And former US Treasury Secretary Lawrence Summer has criticized Britain’s recent monetary policy decisions.
“It makes me really sorry to say this, but I think the UK is behaving a bit like an emerging market turning into a submerged market,” he told Bloomberg’s Wall Street Week last week. Television.
“Between Brexit, the Bank of England’s lag on the curve and now these fiscal policies, I think Britain will be remembered for having (continued) the worst macroeconomic policies of any major country in a long time. “
The collapse of the pound came as markets around the world plunged into a spin on fears of recession caused by a sharp tightening of monetary policy by central banks battling high inflation for decades.
The retreat in London was mirrored in Europe and New York, where the Dow Jones hit a two-year low, and Asia followed suit.
Tokyo lost 2% as traders returned from a long weekend, while Sydney, Seoul, Singapore, Taipei and Jakarta also fell.
But Hong Kong rose as traders welcomed news that the city had eased strict hotel quarantine measures for travellers, giving a much-needed boost to the beleaguered economy.
Macau’s casino stocks led the way as the city announced it would again accept Chinese tour groups from November, after being grounded during the pandemic.
Shanghai shares also rose.
Oil prices edged higher, though they barely made a dent in the big losses suffered on Friday as expectations of a looming recession hammer demand expectations.
– Key figures around 02:30 GMT –
Pound/dollar: FALL to 1.0570 vs. 1.0852 on Friday
Euro/pound: UP at 91.38 pence against 89.28 pence
Euro/dollar: DOWN at $0.9656 against 0.9695
Dollar/yen: UP to 143.82 yen from 143.31 yen
Hong Kong – Hang Seng Index: UP 0.2% to 17,970.69
Shanghai – Composite: UP 0.1% to 3,091.82
Tokyo – Nikkei 225: 2.0% decline to 26,619.53 (pause)
West Texas Intermediate: UP 0.5% to $79.13 a barrel
North Sea Brent: +0.4% to $86.52 a barrel
New York – Dow: DOWN 1.6% to 29,590.41 (closing)
London – FTSE 100: 2.0% drop to 7,018.60 (close)