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 $1.05425, 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 on the contrast between the Fed’s optimism and the Bank of Japan’s insistence on holding on to massive stimulus.

The dollar index – which includes a basket of sterling, the euro and the yen – reached 114.58 for the first time since May 2002 before falling back to 114.02, up 0.78% from the end of last week.

“The strength of the dollar was in large part due to the heavy selling of the pound,” said Saktiandi Subat, Maybank’s regional head of FX research and strategy.

“It’s kind of a risk,” Sopat added. “Fears of a global recession have in fact intensified and broadened.”

The common European currency fell to $0.9528, and was last down 0.71% at $0.9623.

The dollar rose 0.54% to 144.175 yen, extending its rally back towards a 24-year high of 145.90 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 the authorities are ready to respond to speculative moves in the currency. Read more

Elsewhere, the risk-sensitive Australian dollar fell to $0.64865, the lowest level since May 2020, and was last trading 0.6% weaker at $0.6491.

The Canadian dollar reached a new low of 1.3636 Canadian dollars per dollar, its lowest level since July 2020.

The offshore Chinese yuan fell to a new low of 7.1728 against the dollar, its lowest since May 2020.

Domestically, the yuan also touched a 28-month low of 7.1690, which is just below the negative intraday trading limit set by the People’s Bank of China.

The new declines came even as the central bank announced on Monday that it would return foreign exchange risk reserves for some futures contracts, a move that would make betting on the yuan more expensive and slow the pace of its recent decline.

Kevin Buckland reports. Additional reporting by Ray Wei. Editing by Shree Navaratnam, Sam Holmes and Anna Nicholas Da Costa

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