(CTN News) – On Monday, the British Pound reached a record low against the US dollar because of growing fears about the stability of the UK government’s finances.
During the Asian and Australian trading sessions on Monday, there was a nearly 5% drop in the price of the currency to just above $1.00.
This followed a 3.6% decline on Friday, prompting predictions that the British Pound might crash to parity with the US dollar. Traders in Europe returned to the market, and it was back at $1.07 once again.
The currency slump follows an announcement by British Chancellor Kwasi Kwarteng on Friday. As a result of high inflation, the government was forced to increase borrowing and spending at the same time as implementing the biggest tax cuts in 50 years.
A number of serious questions have already been raised about the economic competency of the newly elected government, according to Craig Erlam, senior market analyst at Oanda.
In order to shore up the currency and confidence in the markets, markets are factoring in a substantial emergency rate hike from the Bank of England.”
A new plan unveiled Friday by the UK government to ramp up borrowing to fund tax cuts sent the currency tumbling. Investors have become more concerned about the country’s financial stability as a result.
Tax-slashing measures, including scrapping plans for a corporation tax increase and slashing the top rate of income tax, have been criticized by the opposition Labor Party as “trickle-down economics” and even lambasted by Conservative members themselves.
The government went all out for growth this weekend, with Kwarteng hinting in TV interviews Sunday of more tax cuts to come.
On Sunday, former Tory chancellor Lord Ken Clarke criticized the tax cuts, saying they could cause the British Pound to collapse.
In an interview with BBC radio, Clarke said: “I fear that’s the type of thing that’s usually tried in Latin American countries without success.”
A string of weak economic data has taken its toll on the pound, but so has the steep ascent of the US dollar, a safe haven investment that sees inflows when times are uncertain.
As a result of Giorgia Meloni’s victory in the Italian general election, the euro also hit a 20-year low. The prospect of a far-right government in the European Union has raised concerns about cohesion, as it would be the most far-right since the fascist era of Benito Mussolini.
Due to the United Kingdom’s economic outlook, which faces the highest inflation among G7 nations, and the government’s huge fiscal gamble on growth, the pound has suffered more than most. A comparison with the euro shows a drop of 15% so far this year, compared with a fall of nearly 21% for the dollar.
In 1985, one pound was worth just over $1.05. That was the previous record low for the British pound against the US dollar.
Clifford Bennett, chief economist at Australian brokerage firm ACY Securities, said that if the conflict in Ukraine escalated, we would see more sharp declines in the pound and euro.
He said that the British Pound is more vulnerable than most because of the crisis that’s affecting all of Europe right now.
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