Sterling plunges to lowest rate against dollar since 1985 as investors swallow massive borrowing to tackle energy crisis

·3-min read
 (AFP/Getty Images)
(AFP/Getty Images)

The pound slipped to a new 37-year-low against the dollar on Wednesday afternoon as UK investors swallow the prospect of mammoth borrowing to fund a package to deal with soaring energy bills.

Sterling dipped as low at 1.1403 dollars, surpassing the trough of 1.1412 seen at the outset of the Covid-19 pandemic in March 2020, before bouncing back to 1.15 dollars.

It comes after the dollar continued its recent strong spell, which saw it hit a 24-year high against the Japanese yen earlier in the session.

Sterling had reached as high as $1.1609 a day earlier, as media reports offered new details about how Prime Minister Liz Truss is planning to tackle Britain’s growing energy crisis, before losing steam amid doubts about the effect the plans would actually have.

Ms Truss’s plans could cause Britain’s surging inflation to slow, but the Bank of England’s chief economist Huw Pill told MPs on Wednesday it was too soon to say what that means for interest rates.

The new prime minister is set to announce plans on Thursday to help households cope with the surge in gas and electricity bills caused by Russia’s invasion of Ukraine.

Some financial analysts have put the cost of Ms Truss’s reported plan to freeze energy bills at £100billion pounds or higher.

In fact analysis from Deutsche Bank have put the cost of the measures at almost £200 billion.

Sanjay Rana, a senior economist at Deutsche, said: “We now think that a freeze on energy bills is more likely to land in October rather than January … set around £2,500, for potentially 18 months.”

The fall in the pound was also a result of the stronger dollar which hit a 24-year high versus the Japanese yen on Wednesday and was testing a two-decade high against the euro.

Mr Pill was flanked by Andrew Bailey, governor of the Bank of England, who highlighted the strength of the US currency during a Treasury Select Committee meeting.

Russ Mould, investment director at AJ Bell, said: “The DXY index, which measures the value of the dollar against six major currencies, stands at its highest level since 2002.

“Investors need to keep a close eye on this, because periods of marked dollar strength in the past have seen chaos in emerging markets, but also weakness in developed market stocks and commodity prices for good measure.”

Sterling’s recent drop has been linked to the dual impact of rocketing inflation and the gloomy economic outlook, which last month saw the Bank of England forecast five consecutive quarters of recession.

New Chancellor of the Exchequer Kwasi Kwarteng also spoke to business leaders earlier in the day, highlighting that increased borrowing would be needed to fund the government’s energy plans.

Ms Truss has ruled out imposing a windfall tax to pay for an energy bill freeze.

During her first PMQs she said: “I am against a windfall tax. I believe it is the wrong thing to be putting companies off investing in the United Kingdom just when we need to be growing the economy.”