Sterling fell to an all-time low against the US dollar early Monday morning as markets reacted negatively to the new government’s signals that it would continue with tougher tax cuts, while also trying to support spiraling energy costs for households and businesses.
Sterling fell slightly below $1,035 – the lowest level since the British currency switched to decimal units in 1971 – as Asian markets opened on Monday morning.
The coin has since recovered slightly and was trading above $1,067 at 8 a.m. GMT, according to foreign exchange tracker XE.
The British currency also fell more than 3.7% against the euro, falling below 1.08 euros before recovering to 1.10 euros.
according to Bloomberg, there is now a 26% chance that the volatile pound will reach parity with the US dollar in the next six months.
After hitting a 20-year high last month, the US dollar also continued to gain strength with the dollar index – which measures the greenback against six other major currencies – rising 4.64% in the last 30 days to 113.75 points.
Britain's finance minister, Kwasi Karting, told the BBC on Sunday: "There is more [tax cuts]
To come… I want to see over the next year, that people keep more of their income because I believe it is the British people who are going to lead this economy.” Kwarteng also countered critics who pointed out that his tax cuts disproportionately benefit the rich, saying: "They favor people across the income scale."
The British government, led by new Prime Minister Liz Truss, announced a "mini-budget" on Friday that includes a 45 billion pound ($48 billion) tax cut package. As part of the cuts, Kwarteng eliminated an additional 45% tax rate for people earning more than 150,000 pounds ($161,000) a year, drawing strong condemnation from the opposition Labor Party. The steep tax cuts come at a time when the UK government is also spending heavily to subsidize high energy costs - spurred by the Russian war in Ukraine - to households and businesses. To offset massive tax cuts and public spending, the UK government will have to borrow tens of billions of pounds at high interest rates, a development that appears to have frightened the markets.
Pound hits record high after tax cut plans (BBC)
Sterling falls to a record low against the dollar (Financial Times)