The British sterling hit an all-time lower against the U.S. dollar on Monday in the wake of the government’s decision to pass radical tax cuts to help increase growth, which has added to fears of a global recession.
The slide in the pound comes amid Britain is struggling with a cost of living crisis as well as a soaring public debt, accompanied by a decline in investor confidence. The market also raised the possibility of it could be that the Bank of England may intervene to support the sterling.
The decline is a reflection of the strength of the U.S. dollar, which is boosted by higher rates of interest. However, it also has weakened against other currencies, signaling particular concerns regarding concerns about the British economy.
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The pound sank to the record lowest in the region of $1.03 at the time of Asian trading on Monday morning, after which it gained some ground before getting back to $1.08 — but still lower than the level it hit on early on Friday, before the announcement of the government’s “mini-budget.”
The recession is due to the global market slowdown and the fear of recession grows across a variety of regions. For instance, in the United States, the Federal Reserve increased interest rates this week as part of its continuing efforts to curb the high rate of inflation. The rate was raised for the fifth increase in the past year, and the third in a row with a quarter of a percentage point. The news shook Wall Street, and by Friday, the Dow Jones industrial average had been able to close below 30,0000, which was its lowest since the year 2020.
“We need to put inflation under control,” Federal Reserve Chair Jerome H. Powell said last week. “I would love to have an easy way to accomplish this. It’s not.”
The main U.S. indexes were mixed as of midday on Monday the Dow dropping around 170 points, which is nearly 0.6 percent, and the S&P 500 was down 0.5 percent. Tech-focused Nasdaq was trading flat.
The Bank of England said Monday they were “monitoring developments in the financial markets with great attention considering the dramatic price reductions of assets in the financial sector.”
In an announcement that was released by the central bank, it said its monetary policy committee will conduct a “full analysis” of the effect of the government’s policies and the drop in the pound’s value at its next meeting to be held in November.
“The MPC will not hesitate to adjust interest rates as needed to get inflation back to the target of 2% sustainable in the medium-term as per its mandate,” it said.
The drop in the pound comes just one month after the euro achieved an equal relationship with dollars for the first time in more than two decades. The conflict in Ukraine has affected food supply and has seen energy prices skyrocket across the globe, particularly in Europe. The increasing interest rates of the Federal Reserve have made the dollar a more secure investment option for investors.
Mike Riddell, a senior fixed income portfolio manager at Allianz Global Investors, said the decline in the pound isn’t “necessarily an indication of European recession.” Instead, investors are beginning to doubt Britain’s capacity to combat inflation.
“The most frightening fact is that the world economy is still to feel the effect of the rate increases we’ve witnessed around the globe over the past couple of months since it takes around an entire year for changes to monetary policy to affect economic activity,” the economist wrote in his email.
A less strong currency is, however, not always a sign of the economy’s weakening. In some instances it could be beneficial by, for instance, creating British exports less expensive for those living within America. United States — and therefore, a weak pound could help boost sales abroad for companies that are geared towards exports. However, anything that is based on dollars, such as energy prices, will rise for consumers.
This is a good thing for American travelers in Britain. The United Kingdom, suddenly discover that their money is getting much more. It’s not a great situation for many British families, who face rising energy costs and inflation that is currently at 10. The cost of imports for items and services go up, from vehicles’ fuel to food served on plates 2020 it is expected that the U.K. imported 46 percent of its food consumption.
British Prime Secretary Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng visit Berkeley Modular, in Northfleet, Kent, on Friday. (Dylan Martinez/Reuters)
This Friday Kwasi Kwarteng as the new Chancellor of Exchequer who is also the Finance Minister unveiled tax reductions worth around 45 billion dollars ($48 billion) this is the biggest overhaul to the tax system in the last 50 years. The highest tax percentage of just 45 percent income tax was cut while the maximum for banker bonus payments will be eliminated, and taxes on home purchases were cut in a move that will primarily benefit the wealthier citizens, hoping that they will increase their spending.
Although the new premier, Liz Truss, had promised tax cuts in her campaign for the presidency the size of the cuts was still shocking to many observers of the economy.
“In today’s economic climate, it’s a risky move,” wrote Thomas Pope who is an economist at the Institute for Government. It’s a radical change to the policy of Truss’s predecessor Boris Johnson, who last year announced tax increases to fund the fight against the pandemic.
The new British government is hoping that by reducing taxes and regulations they will be able to create the growth needed to provide public services, and ultimately pay off the debt.
John Hardy, head of foreign exchange strategy at Saxo Bank, said the sterling was falling due to the math of the government isn’t convincing investors.
“It’s a numbers game, and the numbers aren’t a perfect match,” he said.
Investors are interested in the direction of inflation as well as the U.K.’s financial statements.
“They are declaring, ‘I do not want to hold U.K. paper because they aren’t playing with integrity.'”
Truss who is only 3 weeks in her first position has spoken out in support of the tax-cutting bonus.
A few days ago, in an interview, CNN’s Jake Tapper put it to Truss that British opposition groups are framing her plan as “recklessly increasing in deficit” and that President Biden “is, in essence, saying that your plan does not work.”
This week, Biden tweeted: “I am fed up with trickle-down economics. It’s never worked.” Biden was referring to supply-side economics popularized by president Ronald Reagan, which Truss’s strategy echoes.
The interviewer Truss replied: “The U.K. has one of the lowest amounts of borrowing within the G-7. However, we also have one of the highest rates of tax. We currently have an all-time high of 70 years in taxes. What I’m determined to be able to do as the premier and the one that the chancellor is determined to accomplish, is to ensure that we encourage companies to invest. Also, we’re helping common people pay their taxes.”
Truss added: “That’s why I don’t think it’s appropriate to have greater national insurance or higher corporation taxes, as this will make it more difficult for us to draw the investments we need from the U.K. It will be difficult to create those jobs.”