British pound drops to record low in comparison to the dollar
On Monday, the British pound hit a record low versus the US dollar as concerns over the viability of UK government finances grew.
After falling 3.6% on Friday, the pound fell nearly 5% to just around $1.03 on Monday during trading in Asia and Australia, leading to forecasts that the pound will soon fall to parity with the US dollar. As online traders from Europe arrived, it began to recover marginally and returned to $1.07.
According to Craig Erlam, senior market analyst at Oanda, "serious questions are already being raised regarding the economic competence of the new government." So much so that markets are taking into account a considerable possibility of a significant emergency rate hike from the Bank of England in order to support the pound and market confidence.
The opposition Labour Party and even some members of the Chancellor's own Conservative party have blasted the new tax-cutting budgetary measures, which include abandoning plans for a rise in corporation tax and lowering the top rate of income tax, as "trickle-down economics."
Kwarteng stepped up his campaign over the weekend, hinting in TV interviews on Sunday that there will be additional tax cuts, calling the actions taken on Friday "only the start" of the government's all-out growth drive.
On Sunday, Lord Ken Clarke, a former Tory chancellor, attacked the tax cuts and warned that they would cause the pound to collapse.
In a BBC radio interview, Clarke stated, "I'm afraid that's the kind of thing that's normally tried in Latin American countries without success."
The pound has been severely damaged by a run of dismal economic data as well as the sharp increase in the value of the US dollar, a safe haven asset that attracts investment during uncertain times.
After Giorgia Meloni won the Italian general election, the euro also fell to a 20-year low. Investors are keeping an eye on what would be the most far-right administration since Benito Mussolini's fascist rule, which has sparked fears about the cohesion of the European Union.
But the United Kingdom's economy, which confronts the highest inflation among the G7 countries, and the government's huge budgetary wager on growth are hurting the pound more than most. Compared to a decline of 15% in the euro, it has lost approximately 21% of its value so far this year.
On February 25, 1985, when one pound was worth just over $1.05., the British pound hit a record low against the US dollar.
Clifford Bennett, head economist at the Australian trading firm ACY Securities, predicted a further significant decline in both the pound and the euro should the conflict in Ukraine escalate.
The pound is more vulnerable than most currencies, he added, and one should not undervalue the crisis that is currently engulfing all of Europe.
Major Asian currencies fell on Monday as a result of the rising US dollar.
Asian markets and currencies crack
On the domestic market, the value of the Chinese yuan fell 0.5% to its lowest level in more than 28 months. Offshore yuan decreased by 0.4%.
The People's Bank of China implemented a 20% risk reserve requirement on Wednesday for banks selling foreign exchange forwards to clients in response to the sharp falls. Derivative purchases of foreign currencies should become more expensive as a result, which should decrease the rate at which the yuan is losing value.
The Japanese yen decreased 0.6% to 144 against the dollar elsewhere in the area. For the first time since 1998, the Japanese central bank intervened in the currency market last Thursday to support the yen when it reached 145. After the intervention, the yen somewhat recovered, but the decline quickly resumed.
After US equities fell on Friday amid growing recessionary fears, financial markets in Asia were also in disarray on Monday.
The Nikkei 225 (N225) in Japan fell 2.4%, the Kospi in South Korea down 2.7%, and the S&P/ASX 200 in Australia fell 1.4%. London's FTSE 100 (UKX) was the European index that declined the most, although Germany's DAX (DAX) and France's CAC were also down. Italian stocks recovered after last week's decline in anticipation of the elections.
In an aggressive bid to combat the US economy's ongoing problems with high inflation, the Federal Reserve on Wednesday approved a third consecutive 75-basis-point increase.
Even without the Fed's intervention, the war in Ukraine is putting Europe into a recession, and domestic issues are causing "a substantially weak growth dynamic" in China, according to the DBS analysts.
The world economic outlook becomes particularly bleak, they continued, "especially when you put on top of that a steep fall in US dollar liquidity and a sharp increase in US interest rates."
— Julia Horowitz contributed to this article.
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