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£20 note in exchange office in Pakistan: 'Poor situation in UK supports dollar'
Photo: ARSHAD ARBAB/EPA
The British pound has fallen to its lowest level against the dollar since the decimal system was introduced in 1971.
The background to this is fears that the British public finances will not be able to withstand the massive tax reforms of the new government of Prime Minister Liz Truss.
The British currency fell as much as 4.9 percent on Monday to an all-time low of $1.0327 before the pound stabilized at $1.05405, down 2.9 percent from the previous session's close.
This is the biggest drop since the March 2020 stock market crash.
On Friday, when the new Finance Minister Kwasi Kwarteng presented the tax cuts, the rate had already fallen by 3.6 percent.
The plans are not to be financed by a massive borrowing like since 1972.
In view of this, economists and investors have doubts about the financial credibility of the government's plans, especially since the Bank of England had already raised interest rates in the fight against inflation just a day earlier.
Euro falls to 20-year low
"The significant tax cuts announced by the Minister of Finance are causing the foreign exchange market great concern in view of the rising national debt," says Commerzbank analyst Ulrich Leuchtmann.
At the same time, the planned relief threatened to exacerbate inflationary pressure.
"The Bank of England needs to intervene today to stabilize the pound," says Rabobank's investment strategist Michael Every.
The Bank of England is expected to hold an emergency meeting later today to halt the pound's fall.
There could be another rate hike later today, SPI Asset Management's Stephen Innes told the BBC.
The euro is also losing more and more value.
It hit a new 20-year low on smoldering recession fears as the energy crisis deepens as the Ukraine war escalates.
The elections at the weekend in Italy, in which a right-wing alliance won, are also weighing on the common currency.
In the morning it was trading at below 0.97 against the dollar.
The dollar, in turn, extended its recovery against the yen after the shock of last week's currency intervention by Japanese authorities as investors refocused on the contrast between the US Federal Reserve's aggressive stance and the Bank of Japan's insistence on staying put of the massive economic stimulus measures.
"The poor situation in the UK is supporting the dollar," analyzes Joseph Capurso, head of international economics at the Commonwealth Bank of Australia.
And: »Should a feeling of crisis arise in the global economy, the US dollar could rise significantly.«
Apr/Reuters
