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Sterling hits all-time low versus broadly stronger dollar

Published 09/25/2022, 09:28 PM
Updated 09/26/2022, 03:41 PM
© Reuters. FILE PHOTO: Woman holds British pound banknotes in this illustration taken May 30, 2022. REUTERS/Dado Ruvic
USD/CNH
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By John McCrank

NEW YORK (Reuters) -The British pound dropped to an all-time low against the dollar on Monday as investors worried Britain's new economic plan will hurt the country's finances, while the Bank of England said it was watching financial markets "very closely" following sharp moves in asset prices.

The dollar, helped by sterling's decline and a fresh 20-year low for the euro, hit a two-decade high against a basket of six peer currencies.

In Japan, authorities reiterated that they stood ready to respond to speculative currency moves, after they intervened last week to bolster the yen for the first time since 1998.

Sterling fell as much as 4.9% during Asian trading to an all-time low of $1.0327, adding to Friday's 3.6% plunge following the unveiling of new Finance Minister Kwasi Kwarteng's historic tax cuts, funded by the biggest increase in borrowing since 1972. British government bond prices collapsed.

"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," said Derek Holt, head of capital markets economics at Scotiabank.

The pound had largely rebounded from its overnight losses, as traders speculated the BoE might take emergency action to stem the currency's fall, but tumbled again after BoE Governor Andrew Bailey said the central bank was watching the markets, but did not signal any immediate action.

"The communication might have disappointed some segment of the population that is looking potentially for some intervening action from the Bank of England," said Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

Sterling was last down 1.5% at $1.069.

"The market's reactions show that investors have lost confidence in the government's approach, creating a level of volatility that puts the pound on par with some emerging market peers," said Fiona Cincotta, senior financial markets analyst at City Index.

"There is a good chance that the BoE will now be forced to hike rates aggressively in the coming November meeting if an emergency intervention isn't made before," she said.

The euro also touched a fresh 20-year low of $0.9528 and was last down 0.81%.

At 3:10 p.m. Eastern time (1910 GMT), the dollar was up 0.804% at 114.05 against a basket of peer currencies, having earlier touched 114.58, it strongest since May 2002.

"The focus is on sterling but the story on the dollar is far wider and that is the part that is not helping," said Seema Shah, chief strategist at Principal Global Investors.

The dollar firmed 0.84% to 144.585 yen, heading back toward Thursday's 24-year peak of 145.90. It sank to around 140.31 that same day after Japan conducted yen-buying intervention for the first time in more than 20 years.

Japan is estimated to have spent about $25 billion in that dollar-selling, yen-buying intervention, according to estimates by Tokyo money market brokerage firms.

China's offshore yuan slid to a new low of 7.1728 per dollar, its weakest since May 2020. Onshore, the yuan also touched a 28-month trough of 7.1690.

© Reuters. FILE PHOTO: Woman holds British pound banknotes in this illustration taken May 30, 2022. REUTERS/Dado Ruvic

The fresh lows came even as the central bank said it will reinstate foreign exchange risk reserves for some forward contracts, a move that would make betting against the yuan more expensive and slow the pace of its recent depreciation.

The risk-sensitive Australian dollar touched $0.6438, its lowest since May 2020, and was last down 1.02%.

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