The British pound plummets to near parity with the U.S. dollar,

By abbasanwarinfo Last updated Sep 28, 2022

At one point on Monday morning, the pound fell as low as $1.03 US.
The British pound fell to its lowest level against the U.S. dollar since 1985, but it bounced back on Monday as investors thought about the U.K. government’s plans to boost the economy by cutting taxes and borrowing more money to spend on programs.

On Monday morning, traders drove the value of the U.K. pound down by 5%, to just above $1.03 US. This was the first day of trading after Chancellor of the Exchequer Kwasi Kwarteng, who is like Canada’s finance minister, announced the government’s plans to boost economic growth this year.

In response to slow growth and skyrocketing inflation, the conservatives in power want to cut corporate and personal income taxes to their lowest level in 50 years. They also want to borrow more money to help consumers pay less for food and energy.

The British pound plummets

Bipan Rai, a foreign exchange analyst at CIBC, said, “The Truss administration is rewriting the old Reaganomics playbook with big, unfunded personal and corporate tax cuts that are meant to drive investment on the supply side and boost growth.”

When traders heard the news, the pound dropped a lot because they didn’t think the plan would work. Before Monday, the pound hadn’t been worth this little in U.S. dollars since February 25, 1985, when Margaret Thatcher was in charge and it was worth about $1.05.

Most of the early losses on Monday came from trade in Asia. As soon as trade started in Europe, the pound started to get better. By the afternoon in London, speculation grew that the Bank of England might announce an emergency, unplanned rate hike. This made the pound just barely up for the day.

In the end, that didn’t happen. Instead, the central bank just said that it “would not hesitate to change interest rates by as much as needed,” which caused the pound to drop back to about $1.06 US.
The back-and-forth shows how uncertain investors are about the British government’s ability to control inflation without causing the already slow economy to collapse.

“The British have decided that going back to the 1980s on steroids is the best way to go,” said Rabobank strategist Michael Every. “But that’s not going to work.”

“Now, the market looks at the UK as if it were an emerging market. And they’re right about the policy response and the naivety of thinking that you can deal with a “supply-side shock” by boosting demand instead of supply.

Chances are high that the price will go down even more.

Even though the pound went up and down on Monday, experts think it could go even lower.

“Loose fiscal policy during a time of high inflation means that [the pound] will have to revalue lower,” Rai said.

The drop in the value of the pound makes it more likely that the Bank of England will have to raise interest rates even faster than it has been doing so far to stop the bleeding. When the Bank of England meets in early November, traders expect the rate to go up by 125 points, which has never happened before.

On Friday, the yield on a gilt, which is a two-year government bond priced in pounds, went up to its highest level in a decade. On Monday, it went even higher. On Monday, the yield on two-year British gilts was more than 4.5%.
A year ago, the same government debt earned less than 0.5 percent.

There are many good reasons why anything priced in pounds is falling like a rock, but the strength of the U.S. dollar isn’t one of them. As they often do when the economy is uncertain, foreign investors are flocking to the U.S. dollar because they see it as a safe bet.

On Monday morning, the loonie was worth 73 cents US. This is the lowest it has been since 2020.

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