Against a tumultuous backdrop that includes the Ukraine crisis, soaring prices, and China’s COVID-19 lockdowns, sharp fluctuations of some of the world’s major currencies are injecting new uncertainty into the global economic outlook.
On September 26th, the pound sank to a record low against the US dollar as investors rushed to sell the currency and government bonds in a demonstration of skepticism over new Prime Minister Liz Truss’s economic plans, which include large tax cuts funded by steep increases in government borrowing.
At one point in Asian trading, the pound sank as low as $1.0327, surpassing the previous record low reached in 1985, before making back some of its value.
The price of 5-year UK bonds – through which investors loan money to the government – recorded the sharpest fall since at least 1991.
Under Chancellor of the Exchequer Kwasi Kwarteng’s “mini-budget” announced on Friday, the UK is proposing the biggest tax cuts in 50 years, including abolishing the 45 percent tax rate on incomes over 150,000 pounds ($162,000).
The tax cuts, along with a plan to support households in dealing with their rising energy bills, will require the government to borrow an extra 72 billion pounds ($77.7bn) in the next six months alone.
As with other goods and services, the value of most of the world’s major currencies operates on the principle of supply and demand.
When demand for a particular currency is high, the price goes up and vice versa.
The pound’s plummeting value indicates that investors are concerned about the UK’s ability to manage so much extra debt, especially as rising interest rates make borrowing much more costly.
“Confidence in the UK economy is low right now,” Pao-Lin Tien, an assistant professor of economics at George Washington University, told a news source.
“The new prime minister’s economic policy of lowering taxes on the wealthy is not too popular, and the consensus is that it will not work in stimulating the economy.”
While the UK’s tax plans were the initial trigger of the pound’s free fall, economists say that investors’ confidence in the British economy has been waning for some time due to other developments such as Brexit.
