Pound hits record low against dollar after economic package announcement

The British pound fell to a record low against the US dollar on Monday, amid growing fears about the stability of UK government finances.

The drop of nearly 5% to just over $1.03 came during Asian and Australian trading on Monday and extended a 3.6% drop from Friday, spurring predictions that the pound could fall to parity with the US dollar. It rallied a bit as European traders came online, rallying back to $1.07.

The currency’s fall follows the announcement by British Chancellor of the Exchequer Kwasi Kwarteng on Friday that the UK would implement the biggest tax cuts in 50 years, while also ramping up government borrowing and spending.

The new tax-reducing fiscal measures, which include scrapping plans for a corporate tax hike and lowering the top income tax rate, have been criticized as “drip economics” by the opposition Labor Party and even criticized by members of the chancellor’s own cabinet.

Kwarteng hinted in TV interviews on Sunday that more tax cuts are to come, saying Friday’s measures were “just the beginning” as the government struggles to grow.

Former Conservative Chancellor Lord Ken Clarke criticized the tax cuts on Sunday, saying they could lead to the collapse of the pound.

“I’m afraid this is the kind of thing that is normally tried in Latin American countries without success,” Clarke said in an interview with BBC radio.

The pound was impacted by a series of weak economic data, but also by the strong rally in the US dollar, a safe investment that sees entries in uncertain times.

The euro also hit a 20-year low after Giorgia Meloni won a general election in Italy. Investors are monitoring what would be the most far-right government since the fascist era of Benito Mussolini, who raised concerns about cohesion within the European Union.

But the pound is suffering more than most due to the economic outlook in the UK, which faces the highest inflation among the G7 countries, and the government’s huge fiscal gamble on growth. It has lost almost 21% so far this year, compared with a 15% drop in the euro.

The previous record low for the pound sterling against the US dollar was 37 years ago, on February 25, 1985, when 1 pound was worth just over $1.05.

“If there is any escalation to war in Ukraine, we will see a sharper drop in the pound as well as the euro,” said Clifford Bennett, chief economist at ACY Securities, an Australian brokerage.

“One should not underestimate the crisis that is across Europe right now and the pound is more vulnerable than most,” he said.