Markets React to UK’s Task Cuts with a Record Slump of the Pound against the Dollar
The pound has fallen to a record low against the dollar as markets react to the UK’s biggest tax cuts in 50 years.
In early Asia trade, sterling slipped just below $1.04 before regaining some ground to stand at about $1.05 on Monday morning, UK time.
Chancellor Kwasi Kwarteng has promised more tax cuts on top of a £45bn package he announced on Friday amid expectations borrowing will surge.
The pound has also been under pressure due to strength of the dollar.
The euro also touched a fresh 20-year-low against the dollar in morning Asia trade amid investor concerns about the risk of recession as winter approaches with no sign of an end to the energy crisis or the war in Ukraine.
If the pound stays at this low level against the dollar, imports of commodities priced in dollars, including oil and gas, will be more costly.
Other goods from the US could also be considerably more expensive and British tourists visiting America will find that their holiday money does not go as far as before sterling’s slide.
On Friday, Chancellor Kwasi Kwarteng announced a massive shake-up of UK taxes during a “mini-Budget”.
Under the plans, which he hailed a “new era” for the economy, income tax and the stamp duty on home purchases will be cut and planned rises in business taxes have been scrapped.
Mr Kwarteng said a major change of direction was needed to kick-start economic growth.
But Labour said it would not solve the cost-of-living crisis and was a “plan to reward the already wealthy”.
Speaking to the BBC on Sunday, Mr Kwarteng said he wants to keep cutting taxes as part of an effort to boost UK economic growth.
Investors will be watching the pound’s movements closely as financial markets open in the UK, Europe and the US.
Peter Escho, the co-founder of investment firm Wealthy, said: “All currencies are getting sold off against the US dollar, so there is a large element of US dollar strength. But with the pound, it has really been exacerbated by news that the new government will be cutting taxes, which is inflationary.
“Add to that recent energy subsidies and news that the Bank of England might need to have an emergency rate-hike meeting, this all results in a sense of panic,” he added.
Some investors think the Bank of England will be forced to take emergency action to halt the pound’s slide.
“To stop the bleeding even temporarily, the Bank of England may well enter ‘whatever it takes’ territory to bring inflation down. An emergency meeting rate hike could happen as soon as this week to regain credibility in the market. We could even see a hike today,” Stephen Innes, managing partner at SPI Asset Management told the BBC.