The British Pound fell to a historic low against the US Dollar on Monday as concerns over the stability of the UK government’s finances grew.
The almost 5% drop to just above $1.03 occurred during Asian and Australian trade on Monday, extending a 3.6% drop from Friday, prompting speculation that the pound might fall to parity with the US dollar.
It rebounded marginally when European traders returned to the market to $1.07. The currency decline followed the declaration on Friday by British Chancellor of the Exchequer Kwasi Kwarteng that the United Kingdom will enact the largest tax cuts in 50 years while increasing government borrowing and expenditure in the face of rising inflation.
“Serious questions are already being asked about the economic competency of the new government,” said Craig Erlam, senior market analyst at Oanda. “So much so that markets are factoring in a strong chance of a substantial emergency rate hike from the Bank of England to shore up the currency and confidence in the markets.”
The latest tax-cutting budgetary policies, which include cancelling plans for a corporate tax rise and lowering the top income tax rate, have been slammed as “trickle-down economics” by the opposition Labour Party and even by some of the Chancellor’s own Conservative Party.
Kwarteng doubled down over the weekend, suggesting in TV appearances on Sunday that further tax cuts were to come, saying Friday’s measures were “only the beginning” of the government’s push for development.
On Sunday, former Tory chancellor Lord Ken Clarke slammed the tax cuts, warning that they may lead to the pound’s demise.
