Britain’s fiscal plan sends sterling skidding to all-time low

Britain's fiscal plan sends sterling skidding to all-time low
© Reuters. FILE PHOTO: Woman holds British pound banknotes in this illustration taken May 30, 2022. REUTERS/Dado Ruvic/Illustration/

By Kevin Buckland and Joice Alves

TOKYO/LONDON (Reuters) – Sterling skidded briefly to an all-time low early on Monday as investors in Asia reacted to the new British government’s fiscal plan, which threatens to stretch the country’s finances to their limits.

The currency plunged as much as 4.85% to $1.0327 in thin Asia trading, extending a 3.61% dive from Friday, when finance minister Kwasi Kwarteng unveiled historic tax cuts and the biggest increase in borrowing since 1972 to pay for them.

Economists and investors said Prime Minister Liz Truss’s government, in power for less than three weeks, was losing financial credibility in unveiling such a plan just a day after the Bank of England hiked interest rates to contain surging inflation.

Sterling clawed most of its way back in early London trading, however, and was down 0.9% at $1.0760 at 0850 GMT.

Graphic: Sterling at all-time low against dollar

It was 0.7% lower against the euro at 89.97 pence per euro. The euro earlier rose as high as 92.6 pence, its highest in two years.

“Markets have a tendency to overshoot and I wouldn’t overinterpret the fall this morning,” Kit Juckes, head of currency strategy at Societe Generale (OTC:SCGLY) in London.

“But there are two points: one is the loss of confidence in UK fiscal policy and that won’t help sterling. The second is that the mini-budget has allowed sterling to be the short of choice against the dollar”.

Marc Chandler, chief market strategist at Bannockburn Global Forex, called the currency’s record plunge “incredible”.

“The weekend press tarred and feathered sterling with assertions of its emerging-market status,” he said.

“I don’t buy that schadenfreude. Still, there is now bound to be speculation of an emergency BOE meeting and rate hike.”

Kwarteng’s announcement marked a step change in British financial policy, however, harking back to the Thatcherite and Reaganomics doctrines of the 1980s that critics have derided as a return to “trickle down” economics.

The so-called mini budget is designed to snap the economy out of a period of double-digit inflation driven by surging energy prices and a 15-year run of stagnant real wage growth.

In total, the plans will require an extra 72 billion pounds of government borrowing over the next six months alone.

British government bond yields surged by the most in a day in more than three decades on Friday, with yields on the five-year gilt – one of the most sensitive to any near-term shift in interest rate or borrowing expectations – up by half a percentage point.

“In this environment, you either need to see much higher growth – which isn’t happening at the moment – or you need to see significantly higher bond yields to incentivise capital inflows. To get bond yields up to those levels, you need to see the BoE coming out and doing an emergency hike,” said Chris Weston, head of research at Melbourne-based brokerage Pepperstone.

Source: Reuters