British pound falls to almost 40-year low, barely above parity with U.S. dollar

The British pound fell to its lowest level since 1985 on Monday, along with other assets priced in it, as fears mount about dwindling economic growth and the government’s plan to fix it.

Traders pushed the value of the U.K. pound down five per cent, just above $1.03 US, on Monday morning, the first day of trading since Friday, when the pound lost more than three per cent.

The selloff came as Chancellor of the Exchequer Kwasi Kwarteng — the equivalent to Canada’s finance minister — unveiled the government’s plans to boost economic growth this year, through a combination of cutting corporate and personal income taxes to their lowest level in half a century, while also borrowing to spend more money on government programs.

“The Truss administration is rebooting the old Reaganomics playbook with large, unfunded personal/corporate tax cuts expected to drive supply-side investment and spur growth,” said Bipan Rai, a foreign exchange analyst with CIBC.

The pound sold off heavily on the news, as traders expressed their doubts that the plan would achieve its goal of growing the stagnant economy. Prior to Monday, the pound hadn’t been priced this low in U.S. dollars since Feb. 25, 1985, when it was going for about $1.05 and Margaret Thatcher was in power.

The early losses on Monday were mostly coming from trading in Asia. When trading in Europe began, the pound recovered a little, but is still down from last week’s level.

“The British have decided that going back to the 1980s on steroids is the best way to go, and clearly the market is just saying, ‘That’s not going to work,'” said Rabobank strategist Michael Every.

“The market is now treating the U.K. as if it’s an emerging market. And they’re not wrong in terms of the policy response and the naivety of thinking that boosting demand rather than supply is how you deal with a supply-side shock.”

Strong chance of a further drop

Experts suggest the pound could well go lower still.

“Loose fiscal policy during a period of high inflation means that [the pound] will have to re-value lower,” Rai said.

The sell-off in the pound is increasing the likelihood that the Bank of England will have to raise interest rates even more aggressively than it has been, to staunch the bleeding. Traders are expecting an unprecedented 125-point hike when the Bank of England meets in early November.

The yield on two-year government debt priced in pounds — a bond known as a gilt — jumped by its highest level in a decade on Friday, before beating that record on Monday. Two-year British gilts are yielding more than 4.5 per cent on Monday.

A year ago, that same government debt was yielding less than 0.5 per cent.

Anything priced in pounds is sinking like a stone for many valid reasons, but the strength of the U.S. dollar certainly isn’t helping. As it often does during times of economic uncertainty, the U.S. dollar is strengthening as foreign investors flock to its perceived safety.

The loonie is trading at 73 cents US on Monday morning, its lowest level since 2020.

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