Sterling collapses to record low, dollar rises on UK financial woes

A woman holds British pound notes in this illustration taken on May 30, 2022. REUTERS/Dado Rovich/Illustration/

TOKYO (Reuters) – Sterling fell to a record low on Monday as traders sought an exit amid speculation that the new government’s economic plan would squeeze Britain’s finances to the limit.

The sharp drop in the British pound helped the safe-haven US dollar to reach a new two-decade high against a basket of major currencies.

Sterling fell 4.9% to an all-time low of $1.0327, before settling around $1.05,405, 2.9% lower than the previous session’s close.

It fell 3.6% on Friday, when new Finance Minister Kwasi Quarting unveiled historic tax cuts funded by the largest increase in borrowing since 1972. Read more

“The pound is taking a big hit,” said Chris Weston, head of research at Pepperstone.

“Investors are looking for a response from the Bank of England. They say this is not sustainable.”

The euro also touched a new 20-year low for the dollar on fears of an economic recession, as the energy crisis stretches into winter amid an escalation in the Ukraine war. Italy’s weekend elections are also set to push a right-wing coalition to a clear majority in parliament. Read more

The dollar built its recovery against the yen after the shock of last week’s currency intervention by Japanese authorities, as investors refocused their attention to the contrast between the Fed’s hawkishness and the Bank of Japan’s insistence on holding on to massive stimulus.

The dollar index – whose basket includes sterling, the euro and the yen – reached 114.58 for the first time since May 2002 before falling back to 113.73, up 0.52% from the end of last week.

“The bad situation in the UK is exacerbating support for the US dollar, (which) could track rally again this week,” Joseph Caporso, head of international economics at the Commonwealth Bank of Australia, wrote in a report.

“If a sense of crisis emerges around the global economy, the dollar could jump significantly.”

The common European currency fell to $0.9528, and was last down 0.41% at $0.96545.

The dollar rose 0.39% to 143.95 yen, extending its rally towards a 24-year high of 145.90 yen on Thursday. It fell to 140.31 on the same day after Japan intervened to buy the yen for the first time since 1998.

On Monday, Japanese Finance Minister Shunichi Suzuki reiterated that authorities are ready to respond to speculative moves in the currency. Read more

Elsewhere, the risk-sensitive Australian dollar fell to $0.6487, its lowest level since May 2020, and was last trading 0.22% weaker at $0.6516.

The Canadian dollar reached a new low of 1.3625 Canadian dollars per dollar, its lowest level since July 2020.

The offshore Chinese yuan fell to a new low of 7.1630 per dollar, its lowest since May 2020.

The People’s Bank of China said on Monday it would return foreign exchange risk reserves for some futures contracts, a move that would make betting on the yuan more expensive in order to slow the pace of the recent decline.

(Reporting by Kevin Buckland) Editing by Shree Navaratnam and Sam Holmes

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