HONG KONG: The pound hit a record low against the dollar on Monday on growing fears over Britain’s economy after the government unveiled a huge tax cut budget.
The sell-off came as stock markets in Asia and Europe fell again on growing expectations that central bank interest rate hikes to tackle runaway inflation would lead to higher inflation. deep and painful recessions. Oil also suffered from stronger sales.
Officials in several countries, including the United States, Britain, Switzerland and Sweden, have announced further increases in the cost of borrowing.
The moves plunged stock markets into the red again after officials reiterated their focus on fighting inflation, even if that means provoking a recession.
But the week’s biggest casualty was the pound, which fell below $1.10 for the first time since 1985 when new finance minister Kwasi Kwarteng announced his controversial mini-budget.
It then extended losses on Monday to briefly hit a historic low of $1.0350 in Asian trade after saying it intended to unveil further cuts, despite its budget causing turmoil in London markets.
It also fell to a two-year low against the euro, although the single currency remains under pressure against the dollar, standing at 2002 levels.
Now observers are warning that the pound could fall even further.
“The pound crash shows that markets lack confidence in the UK and its financial strength is under siege,” said Jessica Amir of Saxo Capital Markets.
“The pound is a hair’s breadth away from parity and it will only get worse from here.”
Kwarteng, who was appointed by Liz Truss after becoming prime minister earlier this month, said he plans to cut taxes to revive Britain’s economy and provide cash to protect families from soaring costs energy.
But investors have been spooked by the huge amount of borrowing likely needed for the multi-billion pound package, which critics say would benefit the rich far more than the poor during a cost of living crisis.
The decline in the pound has led to speculation that the Bank of England will have to step in with an emergency interest rate hike to give the currency a much-needed boost in the arm.
– ‘Macau’s casinos soar’ – ‘Whether or not the UK government’s announcement of the biggest tax cut since 1972…produces a significant growth dividend is not something that markets are still ready to consider,” said Ray Attrill of National Australia Bank. .
“Instead, they were concerned about the scale of the UK government’s short-term funding needs, at a time when the current account deficit stands at over 8% of GDP.”
He added: “Discussions over a possible downgrade in the UK’s sovereign rating have already begun.”
And former US Treasury Secretary Lawrence Summers has been scathing about Britain’s recent monetary policy decisions.
“It makes me really sorry to say this, but I think the UK is behaving a bit like an emerging market turning into a submerged market,” he told Bloomberg’s Wall Street Week last week. Television.
“Between Brexit, the Bank of England’s lag on the curve and now these fiscal policies, I think Britain will be remembered for having (continued) the worst macroeconomic policies of any major country in a long time. “
The collapse of the pound came as markets around the world plunged into a spin on fears of recession caused by a sharp tightening of monetary policy by central banks battling high inflation for decades.
All three major indexes in New York ended well down, with the Dow Jones at a two-year low, and Asia followed suit.
Tokyo fell more than two percent as traders returned there from a long weekend, while Seoul was down more than three percent, with Sydney, Shanghai, Mumbai, Singapore, Taipei and Jakarta also on the rise to fill up.
Hong Kong was also down after reversing early gains that came after the city announced it would ease strict hotel quarantine measures for international travellers.
Still, Macau casino stocks rallied as the city announced it would again accept Chinese tour groups from November, after being grounded during the pandemic.
London edged higher after Friday’s hammering, while Paris and Frankfurt were also up.
Oil prices fell, extending big losses suffered on Friday as expectations of an impending recession hammered demand expectations.
The surge in the greenback has contributed to the massive sale of crude, which is priced in dollars and therefore more expensive for buyers using other currencies.
Both major contracts are at their lowest level since January, having wiped out any gains seen following Russia’s invasion of Ukraine.
Gary Ross of Black Gold Investors described the strong dollar as “a wrecking ball for commodities.”
– Key figures around 08:10 GMT
Euro/pound: UP at 90.40 pence against 89.28 pence
Euro/dollar: DOWN at $0.9673 against 0.9695
Dollar/yen: UP to 143.96 yen from 143.31 yen
London – FTSE 100: UP 0.3% to 7,039.64
Tokyo – Nikkei 225: 2.7% decline to 26,431.55 (closing)
Hong Kong – Hang Seng Index: DOWN 0.4% to 17,855.14 (close)
Shanghai – Composite: DOWN 1.2% to 3,051.23 (close)
West Texas Intermediate: 0.2% drop to $78.58 a barrel
North Sea Brent: DOWN 0.4% to $85.84 a barrel
New York – Dow: DOWN 1.6% to 29,590.41 (closing)
NATIONAL BANK OF AUSTRALIA