Pound plunges to all-time low as UK economic plan spurs investor flight

TOKYO – The pound sterling fell to a record high on Monday, sparking speculation of an emergency response from the Bank of England (BOE), as confidence evaporated in Britain’s plan to recover. out of trouble, with frightened investors piling in US dollars.

The pound plunged as much as 4.9% to hit an all-time nadir of US$1.0327 before stabilizing around US$1.05405, 2.9% lower than the previous session’s close.

It fell 3.6% on Friday when new finance minister Kwasi Kwarteng unveiled historic tax cuts funded by the biggest increase in borrowing since 1972.

Against the Singapore dollar, the pound fell 2.89% to $1.5079 as of 11:55 a.m., and is now down around 17% this year.

“Sterling is getting hammered,” said Mr. Chris Weston, Pepperstone’s head of research.

“Investors are waiting for a response from the Bank of England. They say it is not sustainable, as growth deteriorates and there is a double deficit.

The dizzying fall in the pound helped propel the safe-haven US dollar to a new two-decade high against a basket of major peers. The dollar index – whose basket includes the pound sterling, the euro and the yen – reached 114.58 for the first time since May 2002 before falling back to 113.73, 0.52% more than at the end of last week.

The euro also hit a fresh 20-year low for the dollar on simmering recession fears, as an energy crisis drags on into winter amid an escalating Russia-Ukraine war. A weekend election in Italy was also expected to propel a right-wing alliance to a clear majority in parliament.

The dollar benefited from its recovery against the yen after the shock of last week’s monetary intervention by the Japanese authorities, as investors once again focused on the contrast between a hawkish US Federal Reserve and the insistence of the Bank of Japan to stick to massive stimulus.

Mr Kwarteng scrapped the top tier of income tax and cut the basic rate by one percentage point, while reversing a rise in the National Insurance payroll tax introduced earlier this year. On Sunday, he appeared unfazed by the fierce response that sent Britain’s assets plummeting, telling BBC television he would not comment on market moves, but when it comes to tax cuts, “he there’s more to come.”

“We’ve only been here 19 days,” Mr Kwarteng said. “I want to see, over the next year, people keep more of their income, because I believe it’s the Brits who are going to drive this economy.”

Yields on UK government bonds climbed by a record high on some maturities on Friday as investors punished the minister for his unbridled drive for growth.

If sustained, the movement in yields will significantly inflate the cost of the additional £400bn (S$616bn) of borrowing that the Resolution Foundation think tank estimates is needed over the next five years to fund the plan, adding to an interest bill. already inflated thanks to skyrocketing inflation and BOE rate hikes.

“With broad unfunded fiscal spending without a monetary policy counterpart to offset the inflationary impulse, the currency is expected to weaken further,” Goldman Sachs analysts wrote in a note to clients on Friday.

Market moves this week could have huge implications. The opposition Labor Party – already enjoying a comfortable lead in the polls – is looking to capitalize on the political chasm that opened up with the Tories at its annual conference, which kicked off in Liverpool on Sunday. Chief Keir Starmer told the BBC on Sunday he would reverse Mr Kwarteng’s most eye-catching measure – the scrapping of the top 45% tax rate levied on income over £150,000.