Matt Cardy | Getty Images The heavy British pound fell 3% against the dollar on Friday after the new UK government announced a radical economic plan in a bid to boost growth. Sterling had fallen to $1.0923 at 4:20 p.m. London time, extending its losses after the measures were revealed in the morning. The pound has fallen sharply against the dollar this year, hitting levels this month not seen since 1985, when it fell to $1,042. Friday’s measures were hailed by the government as heralding a new era for the UK focused on growth, which included a mix of tax cuts and investment incentives for businesses. Investors also abandoned British bonds amid an expected rise in government debt. Paul Johnson, director of the Institute for Fiscal Studies, said markets appeared “frightened” by the scale of the “fiscal gift” and said it represented the highest level of tax cuts in half a century. UK 2-year government bond yields hit their highest level since October 2007 and 10-year yields hit their highest level since 2010. Yields move inversely to prices. The 10-year yield was set for its biggest daily rise since 1998, Reuters reported. At 1:45 p.m. it had risen 26 basis points to 3.759%. UK equity markets also fell, with the FTSE 100 hitting its lowest level since March. It comes after the Bank of England said on Thursday that the UK economy was likely already in recession as it raised interest rates by 50 basis points. Jane Foley, senior FX analyst at Dutch bank Rabobank, said the market appeared skeptical of the government’s 2.5% growth target, although the measures were “shamelessly designed to stimulate demand”. “The obvious implication is that BOE rates are likely to be higher for longer than they would otherwise be. While the textbooks suggest that higher short-term rates should support the currency, GBP has shown since the spring that this is not always the case,” he said in a note. With the UK at a record debt-to-GDP ratio, the pound is vulnerable to a downward revision if foreign investors are reluctant to finance the deficit, Foley said. and “the markets are clearly very dubious about this government’s ability to manage the debt.” The UK is at risk of a currency crisis that could push sterling into parity with the dollar, several analysts have warned. “We believe that the UK will find it increasingly difficult to finance this deficit amid a worsening economy; something has to give and that something will ultimately be a much lower exchange rate,” Citi analyst Vassilios Gionakis said in a research note that quoted by Reuters. The euro also fell against the dollar on Friday afternoon, down 1.1% on the day at 97 cents after a report showed the eurozone PMI fell to 48.2 in September. S&P Global said it meant the bloc was likely to enter recession. The dollar has been boosted this year by stock market volatility and the Federal Reserve’s interest rate hike. But the negative reaction to the pound was still clear, with the euro climbing 1% against sterling to 0.882.
