ritain faced a full-blown currency crisis on Friday as the pound fell into freefall following Kwasi Kwarteng’s mini-budget.
The pound fell more than three and a half cents against the dollar over the course of the day to a new 37-year low of $1.0899.
City investors said the markets had lost all confidence in the government’s ability to keep public finances in check after the chancellor unveiled a massive tax release.
Financial markets now estimate a 20 percent chance that the pound will fall to parity against the dollar for the first time in history, a milestone considered unimaginable until the last few days.
It is the largest one-day drop since the start of the pandemic in March 2020.
The drop means British visitors to America will face the worst exchange rate since the pound fell to $1.05 in the summer of 1985. The dollar has never been worth more than a pound since it was adopted as America’s currency in 1792.
Equity markets were also particularly gloomy, with the FTSE 100 falling to its two-month low.
It comes after the Bank of England launched another 0.5 percentage point rate hike to 2.25% on Thursday, warning that the UK could already be in recession.
The central bank previously predicted the economy would grow in the current financial quarter, but now said it believes gross domestic product (GDP) will fall by 0.1%, meaning the economy would have seen two consecutive quarters of decline. – the technical definition of a recession.
Economists had warned that the Chancellor’s tax-cutting ambitions could put further pressure on the pound, which was also impacted by the strength of the US dollar.
Former Bank of England policymaker Martin Weale warned that the new government’s economic plans “will end in tears” – with a run on the pound in an event similar to the one in 1976.
Economists at ING also warned Friday that the pound could fall further to 1.10 against the dollar amid difficulties in the gold market.
Chris Turner, Global Head of Markets at ING, said: “Normally, a looser fiscal and tighter monetary policy is a positive mix for a currency – if it can be financed with confidence.
“Here’s the problem: investors have doubts about the UK’s ability to fund this package, hence gold’s underperformance.
“As the Bank of England is committed to reducing its gold portfolio, the prospect of indigestion in the gold market is a real prospect and should keep sterling vulnerable.”
The pound also fell 1.2% against the euro, to 1.133 on Friday.
Meanwhile, concerns about higher interest rates and pressure on consumer spending continued to weigh on the stock market.
The FTSE 100 fell below 7,000 for the first time in about six months, but climbed back to around 7,023 points Friday afternoon.
Meanwhile, government bond yields skyrocketed on concerns about the magnitude of the Chancellor’s tax cuts and spending plans.
10-year yields rose about 0.25 percentage point in a period of heavy selling by nervous traders.