The pound plunged to its 37-year low against the dollar as financial markets reacted to the biggest tax cuts in 50 years after Chancellor Kwasi Kwarteng outlined a series of tax cuts and economic measures to shake up the country’s finances on a massive scale. .
Against the dollar, the pound fell more than 3 percent to below $1.09.
Ed Conway, the economics editor of Sky News tweeted: “A brutal, brutal day for sterling.
“Appears to have been paid around $1.09 for now. By my calculations, this is now one of the ten worst days for the pound (vs. basket of other currencies) since 2004.
“Not the ranking that the Chancellor would have liked to participate in today.”
Government borrowing costs skyrocketed after the announcement, rising by near-record levels as investors traded the amounts on the new strategy.
According to data from Bloomberg, analysts expect UK interest rates to reach 5.2 percent by August 2023, while expectations are mounting that there could be a one percentage point rate hike at the next Bank of England meeting in November.
The Institute for Fiscal Studies (IFS), an economic think tank, said the market reaction was “worrying” because the government’s new strategy assumed investors were willing to lend more to the UK.
IFS director Paul Johnson told BBC: “It seems the plan is to borrow large sums at increasingly expensive rates, put government debt on an unsustainable upward path and hope we get better growth.”
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Larry Summers, the former chief of the US Treasury Department, told Bloomberg TV he wouldn’t be surprised if the pound fell below par with the dollar if the Truss administration continues on its current path.
He said: “The UK is behaving like an emerging market turning itself into a sinking market.”
“[It’s] It’s really hard to overstate the extent to which the Kwarteng budget has devastated the gold market,” said Toby Nangle, a former fund manager at Columbia Threadneedle.
To illustrate the magnitude of the turmoil, he said five-year government bond yields had risen the most in one day since 1993 — more than the Covid pandemic, the 2008 financial crisis and 9/11.