The British pound plunged to its lowest level since 1985 against the dollar on Wednesday, undermined by fears of recession in the United Kingdom generated by soaring inflation, while the greenback is prized as a safe haven.
Sign of the scale of the task of the new Prime Minister Liz Truss to revive the British economy, the pound lost around 2:10 p.m. GMT (4:10 p.m. in Paris) 0.83% to 1.1424 dollars, after having sunk to 1.1406 dollar, a level not seen for 37 years.
The surge in gas prices caused by the war in Ukraine threatens to plunge the United Kingdom into recession due to its dependence on this source of energy.
For the new Prime Minister Liz Truss, who is due to announce her plan to support the economy on Thursday, which could include a tariff freeze, "
the balance is precarious between doing too much and not enough
", explains to AFP Francesco Pesole, analyst at ING.
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On the one hand, "
a demand-side remedy (lower taxes and higher public spending to offset rising energy costs for households) to respond to a supply shock raises fears of a deterioration in the financial situation in United Kingdom
,” said Guillaume Dejean, analyst at Western Union.
This makes British assets less attractive, with a surge in bond yields, and weighs on the pound.
The dollar as a safe haven
But the option of more limited measures risks letting inflation rise in the United Kingdom.
The Bank of England's chief economist, Huw Pill, said on Wednesday morning that price containment measures would lower inflation, leading investors to expect a less marked rise in rates.
"
This is what triggered the decline in the pound
" on the session, but "
volatility is to be expected, potentially in both directions, ahead of tomorrow's (Thursday) energy announcements
", warns Francesco Pesole.
The pound returns to its 1985 level, when it had reached a historic low of 1.0520 dollars, before the strength of the dollar which crushed the other currencies pushed several countries to sign the Plaza agreements with the United States, who had decided on an artificial devaluation of the greenback.
