Today, the currencies experienced fierce trading, with the dollar outperforming and the sterling collapsing. What is the reason? The British pound fell to its lowest level ever on Monday against the US dollar, which surged past a 20-year high.
The sterling dropped by 4.9% to an all-time low of 1.0327 dollars before stabilizing around 1.05405, which is 2.9% lower than the previous session's close. Meanwhile, the dollar index rapidly approached 114 points, surpassing its 20-year peak, reaching its highest levels since March 2022, fueled by new comments from the Federal Reserve Chair in Atlanta that sparked a market storm regarding the Fed's continued rate hikes to curb inflation.
Why is the pound being sold off?
Following the news of the pound's record low on Monday, traders rushed to sell it amid speculation that the new economic plan of the London government would further strain public finances. The pound had already dropped 3.6% last Friday when new Finance Minister Kwasi Kwarteng unveiled historic tax cuts funded by the largest increase in borrowing since 1972. Chris Weston, Head of Research at Pepperstone, stated, "The pound is taking a big hit.” He added, "Investors are looking for a response from the Bank of England. They say this cannot continue."
Euro Dips
The euro also saw its largest decline against the dollar in 20 years amid fears of an economic recession, with the ongoing energy crisis and the winter approaching amidst escalating tensions in Ukraine.
Dollar Strengthens
The dollar index reached 114.58 for the first time since May 2002 before retreating to 113.73, up 0.52% from last week's close. Joseph Capurso, Head of International Economics at the Commonwealth Bank of Australia, noted in a report, "The dire situation in the UK is increasing support for the US dollar, which could continue to rise again this week." He added, "If a sense of crisis emerges in the global economy, the dollar could jump significantly."
The euro fell to 0.9528 USD and decreased by 0.41% in the latest trades at 0.96545 USD. The dollar also continued to rebound against the yen after the shock of Japanese authorities' intervention in the currency market last week, as investors refocused on the contrast between the Federal Reserve's tightening policies and the Bank of Japan's insistence on maintaining massive stimulus measures.
The dollar rose by 0.39% to 143.95 yen, continuing its ascent towards peaks last seen on Thursday when it reached 145.90 yen for the first time in 24 years. It dropped to 140.31 yen on the same day after Japan intervened to buy yen for the first time since 1998.
Japanese Finance Minister Shunichi Suzuki reiterated on Monday that authorities are prepared to respond to speculative currency movements. The Chinese yuan also declined overseas to 7.1630 against the dollar, marking its weakest levels since May 2020.
