December 7, 2022

Sterling collapses to all-time rock bottom, Euro at 20-year low

Sterling collapses to all-time rock bottom, Euro at 20-year low

A woman holds British pound notes in this illustration taken on May 30, 2022. REUTERS/Dado Rovich/Illustration/

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LONDON (Reuters) – Sterling fell to a record low on Monday as traders rushed to exit the market amid growing concerns 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, while the euro hit a two-decade low against the dollar.

In Japan, authorities reiterated their willingness to respond to speculative moves in the currency, after they intervened last week to prop up the yen for the first time since 1998.

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But it was the sharp drop in the British pound that caught the attention of traders. It fell 4.9% to an all-time low of $1.0327, before settling around $1.0699 in early London trade – still down 1.5% on the day.

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That followed a 3.6% drop on Friday, when new Finance Minister Kwasi Kwarteng unveiled historic tax cuts funded by the largest increase in borrowing since 1972. Kwarteng on Sunday rejected a free fall in the pound, saying his strategy was to focus more on the long-term. . Growth is not a short-term market reaction.

The pound also fell 1.3 percent against the euro, after hitting its lowest level since September 2020 at 92.60 pence.

Markets tend to overshoot, said Kate Jukes, head of currency strategy at Societe Generale in London, but made two points about the pound’s decline.

“One of them is the loss of confidence in British financial policy and that is not going to help the pound,” he said. The second is that the mini-budget allowed the pound to be the short choice against the dollar.

The euro also touched a 20-year low of $0.9528, as the pound’s decline spread across the markets.

Sunday’s election in Italy, in which a right-wing bloc appeared poised to achieve a solid majority, was a focus.

The dollar benefited from its recovery against the yen after the Japanese authorities intervened in the currency last week.

It rose 0.3 percent to 143.76 yen, heading back towards a 24-year peak hit on Thursday at 145.90. It fell to around 140.31 on the same day after Japan intervened to buy the yen for the first time since 1998.

The dollar index – whose basket includes the British pound, the euro and the yen – reached 114.58 for the first time since May 2002 before falling back to 113.16, which is more stable on the day.

“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 risk-sensitive Australian dollar briefly fell to $0.64845, the lowest level since May 2020, and the Canadian dollar reached a new low of 1.3638 Canadian dollars per dollar, the weakest level since July 2020.

The offshore Chinese yuan fell to a new low of 7.1728 against the dollar, the lowest since May 2020. Inside, the yuan also touched a 28-month low of 7.1690.

The new declines came even as the central bank announced 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.

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Reporting by Dara Ranasinghe. co-reporting by Kevin Buckland and Ray Wei; Editing by

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