On Monday, the British pound fell to an all-time low against the dollar due to investor worries that the UK’s new economic strategy will severely damage the country’s finances. The Bank of England also stated that it was “very closely” monitoring the financial markets in response to sudden changes in asset prices.
The dollar rose to a two-decade high versus a basket of six comparable currencies, supported by sterling’s slide and the euro’s new 20-year low.
The Japanese government, which intervened last week to boost the yen for the first time since 1998, reaffirmed that it was prepared to react to speculative currency movements.
The new Finance Minister Kwasi Kwarteng’s record tax cuts, which were supported by the largest rise in borrowing since 1972, caused sterling to tumble further, dropping as much as 4.9% to an all-time low of $1.0327 after previously plunging 3.6% on Friday.
According to Derek Holt, head of capital markets economics at Scotiabank, “UK markets are blowing up again in the aftermath of the Truss administration’s tone-deaf fiscal generosity that was delivered on Friday into a bond market that loathes any moves that fan inflation risk and increased debt issuance.”
He said, “How could the administration and its political experts have so gravely miscalculated the response to spending hundreds of billions of pounds?
During the London session, the pound made a significant comeback from its overnight decline as traders predicted the BoE would act quickly to stop the decline of the currency. However, the pound fell once more after BoE Governor Andrew Bailey stated that the central bank was monitoring the markets but did not indicate any immediate action. View More
At $1.0675, sterling was recently down 1.64%.
Kwarteng disregarded the currency’s decline on Sunday, claiming that he was more concerned with long-term prosperity. He even gave the impression that further tax cuts were on the way.
According to Fiona Cincotta, senior financial markets analyst at City Index, “the market’s reactions demonstrate that investors have lost confidence in the government’s plan, producing a degree of volatility that puts the pound on par with certain emerging market peers.”
If an emergency intervention isn’t made before, “there is a considerable probability that the BoE will now be obliged to boost rates quickly at the impending November meeting,” she warned.
Additionally, the euro hit a new 20-year low of $0.9528 and was last down 0.83%.
The dollar was up 0.875% at 114.11 against a basket of peer currencies at 12:05 p.m. Eastern time (16:05 GMT), after reaching 114.58, its highest level since May 2002.
Principal Global Investors’ chief strategist Seema Shah said, “The attention is on sterling, but the narrative on the dollar is significantly larger and that is the element that is not helping.”
The dollar increased by 0.8% to 144.535 yen, moving back near its 24-year high of 145.90 set on Thursday. The next day, following Japan’s first yen-buying intervention in more than 20 years, it fell to around 140.31.
According to estimates from Tokyo money market brokerage companies, Japan spent around $25 billion on the dollar-selling, yen-buying intervention.
The offshore yuan of China fell to a new low against the dollar of 7.1728, its lowest level since May 2020. The yuan also reached a 28-month low onshore of 7.1690.
The central bank announced it will reestablish foreign exchange risk reserves for some forward contracts as of the time of the new lows, which would increase the cost of betting against the yuan and decrease the rate of its recent fall.
The Australian dollar, which is susceptible to risk, fell 1.2% to $0.6452, its lowest level since May 2020.