A trader, center, wears a Citigroup jacket while working at the New York Stock Exchange.
Michael Nagle | Bloomberg | Getty Images
The UK government announced the most major tax reduction program in decades on Friday morning when Finance Minister Kwasi Kwarteng said the Finance Ministry was targeting 2.5% trend growth. British economic growth has been slow in recent years and the Bank of England on Thursday he said it was probably in the recession.
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But traders appear to have panicked at the prospect of the UK increasing its already record debt-to-GDP ratio as it spends billions more on economic support for households and businesses amid Europe’s energy crisis. growth in government bond yields the highest daily rate in more than ten years.
The pound had lost more than 3% by 4pm London time on Friday. dollar, which represents a new 37-year low of $1.0915. It was the last time at this level briefly in 1985when it weakened due to a rise in US interest rates
Analysts said there was now a good chance the currencies would reach parity for the first time in history. Sterling is nearing an all-time low of $1.05.
Citi’s Vasileios Gkionakis said he expected the pound to trade between $1.05 and $1.10 over the next few months, but that the risk of a break below, towards parity, had increased.
“We think it will become increasingly difficult for the UK to finance this deficit, such is the deteriorating economic backdrop; something has to give and that something will ultimately be a much lower exchange rate,” he said in a research note.
Antoine Bouvet and Chris Turner of Dutch bank ING said FX options are now valuing the odds of dollar-pound parity by the end of the year at 17%, up from 6% at the end of June.
“Given our bias that the dollar rally will also go into overdrive, we think the market may be underestimating the chances of parity,” they said in a note.
The euro was also weaker against the dollar on Friday, down 1.1%, but against the pound it climbed 1.8% to 0.8890.