Markets have given their instant verdict on chancellor Kwasi Kwarteng’s mini-budget – which includes tax cuts costing up to £45 billion annually – and it makes for grim reading.
Spooked by the biggest raft of tax cuts for half a century, in a “gamble” to raise falling living standards by boosting growth, the pound repeatedly fell to new 37-year lows against the dollar during the day, slowly edging towards its all-time trough.
The last time sterling dipped this low was 1985 – when prime minister Liz Truss’s political hero Margaret Thatcher was in power.
At its lowest point on Friday afternoon £1 could buy just $1.0896, It was a drop of over 3%, and means the pound has lost more than 7% of its value against the dollar in just a month. The value of sterling is more than a fifth lower than it was a year ago.
Sterling hit an all-time low of $1.0545 in March 1985, just before the Group of Seven (G7) economies acted to rein in the superdollar of the Reagan era in the so-called Plaza Accord.
“The is the worst day I’ve ever seen in the markets from a British perspective,” said Neil Wilson, an analyst at Markets.com, as the London stock market also plunged.
Why has the pound fallen so low against the US dollar?
The value of a currency invariably reflects how traders fell about the health of a country’s economy – either for better or worse.
The UK has been suffering from a series of factors – most pressingly, soaring energy bills – but the pound’s plunging value against the dollar is also a measure of the relative strength of the American economy, where inflation is easing and strong jobs numbers continue.
A sustained rally in the US dollar, referred to by traders as the “greenback”, has also hit the euro, which plummeted to a fresh 20-year low against the dollar on Friday amid a suggested downturn across the euro zone. But the euro dropped by only 0.9% to $0.9755.
The Japanese yen was 0.5% lower at $143.14, but is likely to make its first weekly gain in more than a month after authorities intervened to support the currency for the first time since 1998.
In any case, investors have clearly taken fright at the Truss-Kwarteng plan, with concerns over tax cuts and increased public spending adding to the uncertainty influencing traders.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said investors are concerned that government lacks a “coherent policy” at a time when the economy is facing “immense inflationary pressures”.
“I think Kwasi Kwarteng really set off fireworks with his budget,” Streeter told The Associated Press. “It was much bigger and bolder than expected. But the real concern on financial markets as these widespread tax cuts are unfunded, they’re going to add to the government’s debt burden.”
What does this mean for Brits?
The immediate impact of the falling pound is being felt by British travellers heading off for their holidays.
This means that travellers to the US – and to a lesser extent, Europe – will find their pound does not go very far, hiking up the cost of everything from accommodation to food.
Other countries use the greenback as the main currency, so even destinations such as Dubai and China are more expensive as their currencies are pegged to the US dollar.
Is it just holidaymakers who will be affected by the pound’s tumble?
All UK consumers stand to be impacted by a sustained plummet in the value of the pound, because it makes it more expensive for retailers and manufacturers to import food, goods and materials.
This means prices will be pushed up for goods and services, sending UK inflation rising even further and hitting Brits hard in the pocket.
Samuel Tombs, an expert at Pantheon Economics, on Thursday said that inflation will likely increase by around 0.5 percentage points in 2024 because of recent falls in the pound.
This means that every £1,000 that a family spends will be worth £5 less simply because of the drop in sterling, and will leave the average household around £150 worse off every year.
The tumbling pound is also a headache for the Bank of England since it increases the cost of imports and can cause more imported inflation, adding pressure to lift interest rates again – with the knock-on effect of higher mortgage rates. The package was announced a day after the Bank warned the UK may already be in a recession and lifted interest rates to 2.25%.
Are there any benefits to a falling pound?
A weak pound can prove helpful in a number of ways, by making it cheaper for foreign companies to buy UK goods and boosting exports as a result.
It can also increase foreign investment in the UK, for example in property and in shares.
The FTSE 100 Index on London’s stock market usually rises when the pound falls as it is dominated by internationally-focused firms, which trade largely in US dollars.
However, London’s top index fell below the 7,000-point mark for the first time since mid-June during Friday’s trading.
At its trough, the index was trading down 2.5% at 6,981.5 points, its lowest since March when the market had plummeted after a nuclear power plant caught fire in Ukraine.
A falling pound can also increase tourism to the UK, with overseas travellers looking to make the most of a better exchange rate.
This offers a boost to retailers and other sectors, such as restaurants and leisure attractions.
