The pound set a new low versus the dollar on Monday due to escalating concerns about the U.K. economy following the unveiling of a massive tax-cutting budget by the government.
The selloff occurred when most equities markets in Asia collapsed again due to a rising concern that central bank interest rate hikes to combat out-of-control inflation would cause deep and painful recessions.
Officials in several nations, including the United States, the United Kingdom, Switzerland, and Sweden, disclosed more hikes in the cost of borrowing.
Officials’ reaffirmation of their commitment to combating inflation, even if it means triggering a recession, pushed the equities markets back into the red.
The greatest casualty of the week, though, was the pound, which plummeted below $1.10 for the first time since 1985 when new finance minister Kwasi Kwarteng unveiled his controversial mini-budget.
It then extended the losses on Monday to a record low of $1.0350 in Asian trade after he stated he planned to disclose additional reductions, despite his budget causing turmoil in London’s financial markets.
It also sank to a two-year low against the euro, while the euro remained under pressure against the dollar, trading at 2002 levels.
Currently, analysts fear that the pound could reach parity with the dollar.
Kwarteng, appointed by Liz Truss when she became prime minister earlier this month, stated that he intended to reduce taxes to stimulate the British economy and offer cash to help families cope with soaring energy prices.
Critics said that the multibillion-pound package would benefit the wealthy disproportionately during a cost-of-living crisis, which frightened investors.
“Whether or whether the U.K. government’s announcement of the largest tax cut since 1972, would eventually generate a strong growth dividend is not something markets are willing to consider at this time,” said Ray Attrill of the National Australia Bank.
“Instead, they were preoccupied with concerns about the size of the U.K. government’s near-term financial needs, when the current account deficit is greater than 8% of GDP.” He continued, “Conversation about a potential downgrading of the U.K.’s sovereign rating has already begun.”
In addition, former U.S. Treasury Secretary Lawrence Summer criticized recent monetary policy measures made by the United Kingdom.
Last week, he stated on Bloomberg Television’s Wall Street Week, “It pains me to say this, but I believe the United Kingdom is behaving a bit like an emerging economy transitioning into a declining one.”
“Between Brexit, how far behind the Bank of England fell behind the curve, and now these budgetary measures, I believe the United Kingdom will be recognized for having the worst macroeconomic policies of any major country in recent memory.”
The pound devaluation occurred when global markets were sent into a frenzy by fears of a recession induced by a significant tightening of monetary policy by central banks combating decades-long inflation.
The decline in London was replicated in Europe and New York, where the Dow fell to its lowest level in two years, and Asia followed suit.
Sydney, Seoul, Singapore, Taipei, and Jakarta declined after traders returned from a long weekend break.
However, Hong Kong climbed as traders cheered the news that the city has loosened tight hotel quarantine regulations for travelers, delivering a much-needed economic boost.
As a result of the city’s announcement that it would again admit Chinese tour groups beginning in November, Macau casino stocks soared. Shanghai stocks also increased.
Despite a tiny increase, oil prices could not compensate for the significant losses sustained on Friday, as approaching recession fears hammered demand forecasts.