Sterling climbs from all-time low versus dollar, BoE in focus

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Stock Markets 25 minutes ago (Sep 26, 2022 11:05AM ET)

Sterling climbs from all-time low versus dollar, BoE in focus © Reuters. FILE PHOTO: Woman holds British pound banknotes in this illustration taken May 30, 2022. REUTERS/Dado Ruvic

By John McCrank

NEW YORK (Reuters) -The British pound sank to an all-time low against the dollar on Monday before recovering, as traders waited to see if the Bank of England would intervene to ease concerns that Britain’s new economic plan will stretch the country’s finances to the limit.

The dollar, helped by sterling’s decline and a fresh 20-year low for the euro, hit a two-decade high against a basket of six peer currencies.

In Japan, authorities reiterated that they stood ready to respond to speculative currency moves, after they intervened last week to bolster the yen for the first time since 1998.

Sterling’s slide, having already plunged 3.6% on Friday following the unveiling of new finance minister Kwasi Kwarteng’s historic tax cuts, funded by the biggest increase in borrowing since 1972, rippled across markets, falling as much as 4.9% to an all-time low of $1.0327.

“UK markets are blowing up again in the wake of the Truss administration’s tone-deaf fiscal largesse that was delivered on Friday into a bond market that loathes any steps that fan inflation risk and higher debt issuance,” said Derek Holt, head of capital markets economics at Scotiabank.

“How could the admin and its political wonks have so seriously misjudged the reaction to spending hundreds of billions of pounds,” he said.

Kwarteng on Sunday dismissed the currency’s freefall, saying he was focused more on longer-term growth, and even hinted there were more tax cuts to come.

The pound largely recovered during the London session, and was last down 0.29% at $1.0822, while British gilt prices collapsed on speculation that the Bank of England (BoE) might need to take emergency action to stem the fall in sterling.

“The market’s reactions show that investors have lost confidence in the government’s approach, creating a level of volatility that puts the pound on par with some emerging market peers,” said Fiona Cincotta, senior financial markets analyst at City Index.

“There is a good chance that the BoE will now be forced to hike rates aggressively in the coming November meeting if an emergency intervention isn’t made before,” she said.

The euro also touched a fresh 20-year bottom at $0.9528 and was last down 0.31%.

At 10:30 a.m. Eastern time (1430 GMT), the dollar was up 0.239% at 113.41 against a basket of peer currencies, having earlier touched 114.58, it strongest since May 2002.

“The focus is on sterling but the story on the dollar is far wider and that is the part that is not helping,” said Seema Shah, chief strategist at Principal Global Investors.

The dollar firmed 0.6% to 144.23 yen, heading back toward Thursday’s 24-year peak of 145.90. It sank to around 140.31 that same day after Japan conducted yen-buying intervention for the first time in more than 20 years.

Japan is estimated to have spent about $25 billion in that dollar-selling, yen-buying intervention, according to estimates by Tokyo money market brokerage firms.

China’s slid to a new low of 7.1728 per dollar, its weakest since May 2020. Onshore, the yuan also touched a 28-month trough of 7.1690.

The fresh lows came even as the central bank said it will reinstate foreign exchange risk reserves for some forwards contracts, a move that would make betting against the yuan more expensive and slow the pace of its recent depreciation.

The risk-sensitive Australian dollar dropped to $0.64845, its lowest since May 2020.

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