After the mini budget, the pound fell below $1.09 for the first time since 1985. Real

The pound fell below $1.09 on Friday for the first time since 1985 as investors feared the prospect of increased government borrowing to pay for sweeping tax cuts in the mini-budget of the Quasi Quarteng.

Issuing a punitive ruling on the chancellor’s “dash for growth,” traders sent Sterling in a broad-based sell-off on Friday in response to the massive increase in public borrowing needed to finance its plans.

UK government borrowing costs rose by most in one day in at least a decade, while currency slowdown fuels speculation bank of england The UK will be forced to launch an emergency rate hike to improve its battered credibility with global investors.

Deutsche Bank analysts said the sell-off showed that investors were “unprepared to fund the UK’s external deficit situation in the current configuration”, while: “The policy response needed for what is going on is clear: a The big, intra-market rate hike was completed as soon as next week to gain credibility with the market.

US investment bank JPMorgan said it highlighted a “widespread loss of investor confidence in the government’s approach”, while Citi said the chancellor’s tax is cheaper, largest since 1972 Risked a “confidence crisis in Sterling”.

The pound fell three and a half cents to a new 37-year low against the dollar, trading below $1.09, as fears over the future course for public finances also raised government borrowing costs. decline after chancellor £45bn of tax cuts announced Directed to high earners.

“I’ve worked on some 60 financial events over 31 years. I don’t remember any producing as strong a market reaction as today,” said Nick McPherson, the former Permanent Secretary of the Treasury under three chancellors.

Asked about the fall in sterling on a visit to Kent after the mini budget, Quarteng said: “I don’t comment on market movements.”

the pound falls

On a day of heavy selling pressure in the global financial markets, FTSE After recovering ground after falling below 7,000 on the day for the first time since Russia’s invasion of Ukraine, the 100 day ended down 2%.

Two-year UK government bond yields – which are inversely related to the value of bonds and rise as they fall – rose 0.4 percentage points to close to 4%, to reach the highest level since the 2008 financial crisis.

Yields on 10-year bonds rose more than 0.2 percent since Liz Truss took office as prime minister earlier this month, nearing 3.8%, continuing a dramatic climb. In early September, yields on the benchmark UK sovereign debt rose nearly one percentage point, significantly higher than comparable advanced economies.

Finance industry leaders said the UK’s wealth was declining substantially compared to comparable leading economies.

Former US Treasury chief Larry Summers said he would not be surprised if the pound fell to the dollar if the truce government continues on its current path. “The UK is behaving like an emerging market that is turning itself into a submerged market,” he told Bloomberg TV.

,[It’s] Toby Nangal, a former fund manager at Columbia Threadneedle, said, “It is really hard to say to what extent the Quarteng Budget has ruined the gilt market.” Describing the scale of the turmoil, he said the five-year gilt yields were the highest in a single day since 1993 – surpassing the Covid pandemic, the 2008 financial crisis and 9/11.

Britain’s experiment with trussonomics comes at a challenging moment, as the US dollar strengthens in international markets, major central banks raise interest rates, and advanced economies around the world increase borrowing costs amid low growth and rising inflation. encounters.

However, investors said Britain was being isolated due to steps being taken by the new prime minister, after the government had damaged its reputation for sound economic management.

Gabrielle Foa, a portfolio manager at Algebris Investments, said the UK had lost “a lot of credibility” and “pushed the market’s patience” through a series of economic mistakes.

,[It’s about] Covid management, government instability, Brexit management. It’s just one big, let’s say, series of concerns. Britain was in the first league, [but] It is moving from first to second to third. If you give some indication that you’re not credible you move up the league.”

To finance the chancellor’s tax cuts and energy price guarantees, the Treasury said it would need to issue £72.4bn in additional UK government bonds to investors in the current fiscal year, taking the total to £234.1bn in 2022-23 .

It comes at a time when the Bank of England is also selling off £80bn of gilt held on its balance sheet created under its quantitative easing programme, thereby selling large amounts of government bonds to investors.

Markets bet that the bank will be forced to raise interest rates by more than 5% by May next year – more than double the current rate of 2.25% – on hopes Quarteng’s tax cut will add significantly to inflationary pressures.

Vivek Paul, UK Chief Investment Strategist at BlackRock Investment Institute, said: “The credibility of the UK is what markets are reacting to.

“Over time we’ll know if there will be any fundamental changes. The jury is out, [but] The initial reaction from the markets is not a ringing support. Let’s put it this way. ,

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