Pound hits record low in scathing appraisal of fiscal plan, markets slide on recession fears
TOKYO: The pound slumped to a record low against the dollar on Monday (Sep 26), prompting speculation of an emergency response from the Bank of England as confidence evaporated in Britain's plan to borrow its way out of trouble.
The carnage was not confined to currencies, as concerns that high interest rates could hurt growth also knocked Asian shares to a two-year low, with demand-sensitive stocks such as Australia's miners and carmakers in Japan and Korea hit hard.
"The movements over the last couple of trading days are quite fierce," said Paul Mackel, global head of FX research at HSBC in Hong Kong. "It's a strong reminder about how suddenly the drivers for exchange rates can change."
The pound plunged nearly 5 per cent at one point to break beneath 1985 lows and hit US$1.0327.
Moves were exacerbated by thinner liquidity in the Asia session, but even after stumbling back to US$1.05, the currency is still down about 7 per cent in just two sessions.
Against the Singapore dollar, the pound sank 2.7 per cent in early trade to S$1.5111 as of 11.30am on Monday.
"The market is now treating the UK as if it's an emerging market," said Rabobank strategist Michael Every in Singapore.
"And they're not wrong in terms of the policy response and the naivety of thinking that boosting demand rather than supply is how you deal with a supply side shock," he said.
"If this carries across into European trading you're going to get at a minimum a public statement from the BOE threatening (action) and ... a strong possibility that they have to make an inter-meeting hike, and a chunky one at that."
The collapse in sterling came as markets across the world are sent into a spin by recession worries caused by a sharp tightening of monetary policy by central banks fighting decades-high inflation.
Tokyo shed more than 2 per cent on Monday as traders there returned from a long weekend break, while Seoul was off more than 3 per cent, with Sydney, Shanghai, Mumbai, Singapore, Taipei and Jakarta also tanking.
Hong Kong reversed early gains that came after the city said it would relax strict hotel quarantine measures for travellers.
New British finance minister Kwasi Kwarteng, who was put in place by Liz Truss after she became prime minister earlier this month, announced in a mini-budget on Friday that he planned to slash taxes to kickstart the British economy and provide cash to cushion families from rocketing energy costs.
But investors were spooked by the huge amount of borrowing likely needed for the multi-billion-pound package, which critics said would benefit the rich far more than the poorest during a cost-of-living crisis.
In total, the plans will require an extra £72 billion of government borrowing over the next six months alone.
"Whether or not the UK government announcement of the biggest tax reduction since 1972 ... will in time yield a significant growth dividend is not something markets are yet willing to contemplate," said National Australia Bank's Ray Attrill.
"Instead, they were consumed by worries over the scale of near-term UK government financing needs, at a time when the current account deficit is running at more than 8 per cent of GDP."
He added: "Chatter about a possible UK sovereign rating downgrade has already begun."
Oil and gold were under pressure due to the surging greenback, with gold hitting a 2.5-year low of US$1,626 and Brent crude futures down about 1 per cent to the lowest since January at US$85.06 a barrel.
The dollar built on its recovery against the yen following the shock of last week's currency intervention by Japanese authorities, as investors returned their focus to the contrast between a hawkish Federal Reserve and the Bank of Japan's insistence on sticking to massive stimulus.
The dollar index - whose basket includes sterling, the euro and the yen - reached 114.58 for the first time since May 2002 before easing to 113.73 - 0.52 per cent higher than the end of last week.
"The poor situation in the UK exacerbates support for the USD, (which) can track higher again this week," Joseph Capurso, head of international economics at Commonwealth Bank of Australia, wrote in a report.
"If a sense of crisis about the world economy were to emerge, the USD could jump significantly."