The U.K. pound sterling hit its all-time low against the U.S. dollar on Monday, dropping by 4.9 percent to $1.0327.
The plunge followed an announcement by the British Chancellor of the Exchequer, Kwasi Kwarteng, on Friday about the new Growth Plan involving a tax cut of basic income to 19 percent by April next year. The government will borrow funds to run the plan, which reportedly will be its largest loan since 1972. Due to the 2.5 percent trend rate of growth, corporate tax will not be increased.
Derek Holt of Scotiabank described the plan as "tone-deaf," saying it had caused investors to panic.
"UK markets are blowing up again in the wake of the Truss administration's tone-deaf fiscal largesse that was delivered on Friday into a bond market that loathes any steps that fan inflation risk and higher debt issuance,” Holt said.
Following Chancellor Kwarteng's announcement, the sterling immediately saw a 3.6 percent drop against the U.S. dollar. The British government bond prices also experienced a significant decrease.
The Bank of England Governor Andrew Bailey said that the institution monitored the market “very closely” after seeing Friday's plunge. The statement, however, did not guarantee immediate action by BoE.
“The communication might have disappointed some segment of the population that is looking potentially for some intervening action from the Bank of England," Bipan Rai of CIBC Capital Market said.
The sterling recovered from its Friday loss during the weekend before reaching its steepest drop on Monday. When the market closed on Monday, the sterling fell by 1.5 percent to $1.069.
Fiona Cincotta of City Index explained that the reaction showed investors’ loss of confidence in the government’s action. This distrust created market volatility that placed the sterling “on par” with emerging markets. Cincotta also said that the reaction might cause the BoE to implement aggressive rate hikes in the next meeting in November.
Other currencies against U.S. dollar
Other major currencies—the euro, Australian dollar, yen and offshore yuan—also struggle against the U.S. dollar's recent growth. The greenback went up by 0.804 percent at 114.05 against these currencies on Monday afternoon. Earlier in the day, the U.S. greenback hit its highest point since May 2022 at 114.58.
The euro reached its lowest in two decades against the greenback at $0.9528 yesterday, or down by 0.81 percent. Meanwhile, the Australian dollar hit its lowest position against the U.S. dollar since May 2020 at $0.6438, or down by 1.02 percent.
Last week, Japan took action to control the yen’s continuous decline against the U.S. dollar. The country sold its dollar assets and purchased yen, spending approximately $25 billion to fund the initiative. The result was brief growth of the Japanese currency against the U.S. currency. The U.S. greenback strengthened by 0.84 percent on Monday to 144.85.
The Chinese offshore yuan also plunged to its lowest point since May 2020 at 7.1728 per $1. This new low occurred despite the Chinese central bank’s announcement about reinstating the forex risk reserves for some futures contracts. The Chinese government took the measures to slow down the depreciation of the yuan.