The pound has fallen to its lowest level against the US dollar since decimalisation in 1971. In early Asia trade, sterling fell by more than 4% to $1.0327 before regaining some ground to around $1.05. That came after UK Chancellor Kwasi Kwarteng unveiled historic tax cuts funded by huge increases in borrowing.
The pound has also been under pressure as the dollar has been boosted by the US central bank continuing to raise interest rates. 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.
Peter Escho, the co-founder of investment firm Wealth, 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 subsidy and news that the Bank of England might need to have an emergency rate-hike meeting, and 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 BOE 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.
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 the sterling’s slide. Investors will be watching the pound’s movements closely as financial markets open in the UK, Europe – and later on Monday – the US.
