By Jack Barnett
The pound today sunk to its lowest level against the US dollar since 1985, driven by investors sweating over the health of the UK economy and a borrowing splurge.
Sterling fell to $1.1406 briefly today, marking another dismal milestone for the currency. The last time the pound fell that low was when Margaret Thatcher was prime minister.
New prime minister Liz Truss will tomorrow announce plans to freeze energy bills at £2,500 and provide help for businesses grappling with soaring gas prices at a cost of around £120bn to the taxpayer.
The package is anticipated to be funded through a short-term borrowing surge, which is likely to put downward pressure on the pound by prompting investors to demand a discount in exchange for exposure to the ailing UK economy.
The government issues bonds when it needs to buy goods and services it cannot cover through tax revenue. A big bond issue often results in a drop in bond prices and puts downward pressure on the pound.
Pound to US dollar exchange rate this year
Britain has also historically run a trade deficit, meaning it imports more than it exports. The country has to rely on borrowing from foreign investors to fund that deficit, putting extra pressure on sterling.
The pound has also come under intense pressure from investors ditching sterling-denominated assets and flowing dollar-based assets to capitalise on the Federal Reserve’s rate hikes.
The Fed has lifted borrowing costs 225 basis points since March, while the Bank of England has raised them 165 basis points since December.
US rates are anticipated to rise another 75 basis points later this month, the third such rise in a row.
Investors have curbed bets on Bank governor Andrew Bailey and co sending rates 75 basis points higher next Thursday.
Experts have warned the pound is likely to slide even further against the dollar.
Consultancy Capital Economics last month said the currency would plunge to $1.05, its lowest ever level against the greenback.
The group also warned it could reach parity with the dollar.
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