The British pound hit its lowest level since July 1, 2020.
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The beleaguered pound fell 3% against the dollar on Friday after Britain’s new government announced a sweeping economic plan in a bid to boost growth.
The pound had fallen to $1.0923 at 4:20 p.m. London time, extending losses incurred after the measures were unveiled in the morning.
The pound has seen a steep fall against the greenback this year, reaching this month levels not seen since 1985, when it fell to $1.042.
Friday’s measures were touted by the government as heralding a new era for the growth-focused UK, and included a mix of tax cuts and investment incentives for businesses.
Investors also dumped UK bonds amid an expected rise in government debt. Paul Johnson, director of the Institute for Fiscal Studies, said markets appeared “frightened” by the scale of the “tax giveaway”, and said it represented the highest level of tax cuts in one half century.
Yields on 2-year UK government bonds hit their highest level since October 2007, and 10-year yields hit their highest level since 2010. Yields move inversely to prices.
The 10-year yield was set for its biggest daily rise since 1998, Reuters reported. By 1:45 p.m., it had risen 26 basis points to 3.759%.
UK stock markets also fell, with the FTSE 100 hitting its lowest level since March.
It comes after the Bank of England said on Thursday that Britain’s economy was likely already in recession as it raised interest rates by 50 basis points.
Jane Foley, senior FX strategist at Dutch bank Rabobank, said the market appeared skeptical of the government’s 2.5% growth target, although the measures were “unapologetically designed to stimulate demand”.
“The obvious implication is that BOE rates are likely to be higher for longer than they otherwise would have been. While the textbooks suggest higher short-term interest rates should support the currency, the GBP has shown since the spring that this is not always the case.
case,” she said in a note.
With the UK hitting a record debt-to-GDP ratio, the pound is vulnerable to a downgrade if foreign investors are reluctant to finance the deficit, Foley said; and “the markets clearly doubt the ability of this government to manage the debt”.
The UK is at risk of a currency crisis that could see the pound hit parity with the dollar, several analysts have warned.
“We believe the UK will find it increasingly difficult to finance this deficit in a deteriorating economic environment; something has to give, and that something will end up being a much lower exchange rate,” said Citi analyst Vasileios Gkionakis in a research note quoted by Reuters.
The euro was also down against the dollar on Friday afternoon, losing 1.1% on the day to 97 cents after a statement showed the Eurozone Purchasing Managers’ Index fell to 48. ,2 in September. S&P Global said this meant the bloc was likely to enter a recession.
The dollar has been boosted this year by volatile equity markets and rising Federal Reserve interest rates.
But the negative reaction to the pound was still sharp, with the euro climbing 1% against the pound to 0.882.