Pound drops to ALL-TIME low of $1.035 against US dollar – in good news for tourists spending abroad

The British pound fell to its lowest level against the US dollar on Monday morning as traders looked for exits amid speculation that a new government spending plan will strain the UK’s finances to its limits.

The decline came as trading in Asia and Australia kicked off on Monday, with the British currency falling for the first time to $1,035 on Monday, plunging more than 4 percent from the previous week’s close and extending a 2.6 percent plunge from Friday. .

The unprecedented slump follows last week’s announcement by Britain’s new Chief Finance Officer that it would implement tax cuts and investment incentives to boost growth amid fears of an impending recession.

It also comes as the currency experienced more than a year-long rally after plunging to just above $1.2 at the start of the pandemic, before hitting a year-long high of $1.34 in May last year. shot.

Since then, the pound has fallen to a low not seen since the introduction of decimalization – when Britain shifted its currency evaluation system to decimal form, with financiers now fearing it could finally reach parity with the pound for the first time in history. US dollar could fall.

While that could be good news for U.S. tourists looking to stretch their dollar while vacationing across the pond, critics are warning that economic measures taken by Britain’s new Chancellor of the Exchequer Kwasi Kwarteng – a series of tax cuts that could come in half. century – the rich will benefit disproportionately.

Experts further warn that as the pound continues to fall due to the current economic uncertainty, citizens could see the UK incurring record levels of debt at a time of rising interest rates and rampant inflation.

The currency went into free fall on Friday after the Kwarteng announcement, falling from 1.12 to 1.08 in hours – a drop of 3.6 percent.

As a result, the British pound’s sharp fall helped the safe-haven US dollar reach a new two-decade high against its foreign counterparts, such as the rapidly declining euro and yen, following the shock of last week’s currency intervention. by the Japanese authorities.

Investors, meanwhile, have largely turned their focus back to the contrast between an aggressive Federal Reserve and the Bank of Japan’s insistence on holding on to massive stimulus measures as global banks around the world try to fight post-pandemic inflation.

That said, the rebound renews concerns about continued increases in basic necessities and goods, as the Fed hiked rates another 0.75 last week — the fourth such hike this year.

Meanwhile, new UK finance officer Kwarteng announced on Friday that the UK would impose its biggest tax cuts in 50 years while boosting spending.

“We need to unleash the power of the private sector,” Kwarteng said Friday, announcing the austerity measures, just months after replacing more conservative Chancellor Ken Clarke.

Kwarteng’s strategy — which would introduce tax cuts and investment incentives to boost growth — could work very well in the long run, but even if it does, financiers warn, the market will likely be in ruins in the meantime.

‘[It] it doesn’t look like the UK government is throwing the market a bone here in terms of a much more moderate fiscal trajectory,” Mazen Issa, senior global trading strategist at TD Securities, told CNBC before the pound hit its new low.

“So I think right now,” Issa continued, “the path of least resistance will remain lower.”

The finance official further warned against the pound approaching parity with the US dollar, which has never been seen in history for the pound – and only a select few times for comparable currencies such as the euro.

“Under $1.05, you’re really looking at parity,” he told CNBC’s Squawk Box Asia.

“We’ve seen the euro fall below parity – I don’t see any reason why the pound can’t.”

He added that the Bank of England’s pledge, which will come if Parliament also tries to stimulate the economy, will serve as a “great challenge” because the two efforts are fundamentally opposed.

Former Chancellor Clarke criticized the proposed cuts on Sunday, saying it could lead to the full and utter collapse of the pound.

“I’m afraid that sort of thing is usually tried unsuccessfully in Latin American countries,” the former finance official said in an interview with BBC radio.

The pound was plagued by a string of weak economic data, as well as the steep appreciation of the US dollar, which affected other currencies, such as the euro, which fell below parity for the first time in 20 years on Tuesday. The European currency is currently at .963.

The declining value of both currencies adds another worrying element amid the current economic uncertainty in countries around the world as they seek to offset losses incurred during the pandemic.

In addition, the US dollar largely serves as a safe-haven investment that sees inflows in times of uncertainty – meaning it will often rise in times of economic turmoil, while other currencies fall.

In the Asia-Pacific region, the currencies of Japan, South Korea and China all weakened against the dollar, while the Australian dollar remained broadly flat.

Against the dollar, the Japanese yen was trading at 144 levels, weaker compared to after the country’s federal government intervened in the foreign exchange market last week.

South Korea’s profit on Monday was close to the 2009 level of $1,428.52 per dollar.

That said, the economic outlook in the UK means the pound is suffering more than most, in the face of a catastrophic energy crisis and the highest inflation among the G7 countries.

The previous record low for the British pound against the US dollar was 37 years ago on February 25, 1985, when 1 pound was worth $1,054.

Both countries continue to battle rampant inflation as the world struggles to recover from the pandemic, with the UK at 9.9 per cent as of August 2022 and the US at 8.3 per cent – both lower than previous record highs. months.