The pound fell sharply against the dollar after the government’s mini budget

LONDON – Sterling hit an all-time low against the US dollar on Monday after the new government moved to enact sweeping tax cuts to boost growth, adding to global recession fears.

The pound’s decline comes as Britain grapples with a cost-of-living crisis and mounting public debt amid deteriorating investor confidence. It also raised the possibility of the Bank of England stepping in to support the Pound Sterling.

The decline partly reflects the strength of the US dollar, which was boosted by higher interest rates. But it also fell against many other currencies, indicating specific concerns about the British economy.

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The pound hit a record low of $1.03 in early Asian trading Monday, before regaining some ground and settling around $1.08 – still well below what it was on Friday morning before the government unveiled its “mini-budget”.

The recession comes as global markets falter and recession fears grow in many geographies. In the United States, the Federal Reserve raise interest rates last week in its constant quest to curb high inflation. This was the fifth rate increase this year and the third in a row by three-quarters of a percentage point. This led to Wall Street turmoil, and by Friday The Dow Jones Industrial Average closed below 30,000to its lowest point since 2020.

Federal Reserve Chairman Jerome H. Powell, last week: “We have to put inflation behind us.” “I wish there was a painless way to do it. There isn’t.”

Major US indices were mixed at midday Monday, with the Dow down nearly 170 points, or nearly 0.6 percent, and the Standard & Poor’s down 0.5 percent. The tech-heavy Nasdaq was flat.

The Bank of England said on Monday that it is “watching developments in the financial markets closely in light of the repricing of large financial assets”.

in a permitThe central bank said its monetary policy committee will conduct a “full assessment” of the impact of the government’s measures and the pound’s depreciation at its next meeting, scheduled for November.

“The Monetary Policy Committee will not hesitate to change interest rates as necessary to bring inflation back to the 2% target sustainably over the medium term, in line with its mandate,” she said.

The pound’s decline comes about two months after the euro reached parity with the dollar for the first time in Almost two decades. The war in Ukraine disrupted the food supply and led to rising energy costs around the world, especially in Europe. This, along with an interest rate hike by the Federal Reserve, has made the dollar a relatively safer bet for investors.

Mike Riddell, fixed income portfolio manager at Allianz Global Investors, said the pound’s decline was not “necessarily a symptom of a European recession”. Instead, investors are starting to doubt Britain’s ability to fight inflation.

“The scary thing is that the global economy has yet to feel the impact of all the rallies we have seen around the world in the past few months, because changes in monetary policy take about a year to have an impact on the economy,” he said in an email.

Of course, a weak currency does not necessarily reflect a weak economy. In many cases, it would be beneficial, for example, to make British exports cheaper for US consumers – so a weak sterling would boost overseas sales for export-oriented firms. But that means anything dollar-denominated, like energy costs, will go up for consumers.

It’s good news for American tourists in the UK, who are suddenly finding that their dollars go much further. It’s not good news for many British families, who are already facing high energy bills and inflation of up to 10 per cent. They will find that the costs of imported goods and services will rise, everything from fuel for vehicles to food on plates – in 2020, the UK imported 46 per cent of the food it consumed.

On Friday, new Finance Minister Kwasi Quarting announced a package of tax cuts worth 45 billion pounds ($48 billion), in the biggest overhaul of the country’s tax system in 50 years. The top income tax rate has been lowered by 45 percent, bankers’ bonus caps will be eliminated, and taxes on home purchases lowered — steps that will often help wealthier citizens in hopes of increasing their spending.

While the new prime minister, Liz Truss, pledged tax cuts during her election campaign, the scale of the cuts still shocked many economic observers.

“In the current economic environment, it’s a huge gamble,” Wrote Thomas Pope, an economist at the Institute of Government. It’s a big shift away from the policies of Truss’ predecessor, Boris Johnson, who last year announced tax increases to help pay for the pandemic.

The new British government hopes that by cutting taxes and regulations, it will be able to generate growth that helps fund public services and eventually pay off debt.

John Hardy, head of foreign exchange strategy at Saxo Bank, said the pound is falling because government accounts do not reassure investors.

“It’s a numbers game and their numbers don’t match,” he said.

Investors are looking for the direction of inflation and on the UK’s balance sheet.

“They say, ‘I don’t want to own the UK cards because they don’t play responsibly.'”

Truss, who is only three weeks into her new job, has defended the tax-cutting boom.

at recent days an interviewCNN’s Jake Tapper told Truss that Britain’s opposition parties formulate their plans “recklessly increasing the deficit” and that President Biden is “essentially saying your style isn’t working.”

Last week, Biden chirp: “I’m sick and tired of the choppy economy. It never worked.” He was referring to the supply-side economics that President Ronald Reagan was famous for, which is similar to Truss’ approach.

Truss replied in the interview: “The UK has one of the lowest levels of debt in the G7. But we have one of the highest levels of taxation. Currently, we have the highest level of tax rates we have had in 70 years. And what I am determined to do as prime minister, what the chancellor is determined to do.” To do, is to make sure that we incentivize companies to invest. We also help ordinary people with their taxes.”

Truss continued: “That’s why I don’t feel it’s right to have higher national insurance and a higher corporate tax, because that will make it more difficult for us to attract the investment we need in the UK. And it will be difficult to generate those new jobs.”

Rachel Lerman in Washington contributed to this report.

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