Pound strings wins against US dollar as borrowing costs rise

Wednesday 05 October 2022 09:51

The British pound fell 0.66% against the greenback to buy $1.1405. It was up slightly against the euro (Photo Illustration by Matt Cardy/Getty Images)

The pound tumbled against the US dollar today, cutting off some of the gains it has made since the currency crashed after the Kwasi Kwarteng mini-budget last month.

The British pound fell 0.66% against the greenback to buy $1.1405. It was up slightly against the euro.

Major world currencies have fallen against the dollar this year.

The currency climbed to a two-week high against the dollar yesterday after the government tried to assuage market jitters over its tax cut and borrowing spree.

Treasury officials confirmed yesterday that Chancellor Kwarteng would give earlier than expected more details of his plans to shore up public finances to help absorb £43billion in tax cuts and more debt to fund the freezing of the energy bill.

The second mini-budget will be accompanied by independent forecasts from the Office for Budget Responsibility breaking down the impact of the government’s plans on the UK’s debt load.

Rates on the British 10-year gilt

The pound tumbled and UK borrowing costs jumped today.

It’s unclear when the plans and report will be released, but it will likely be later this month and certainly before the originally scheduled November 23 date.

The pound is trading above levels reached before the Kwarteng mini-budget on September 23rd. It plunged to a record low against the dollar last month.

Despite the rally, analysts are optimistic about the outlook for the currency.

“The pound has rallied, but we think its large current account deficit, among other factors, will push the pound down,” said Jonas Goltermann, senior market economist at Capital Economics.

Britain runs a large trade deficit, meaning it imports more than it exports. To fill this gap, it borrows money from international investors. This reliance on foreign borrowing is putting downward pressure on the pound.

UK bonds snapped a winning streak and plunged today, pushing yields higher. The two move in opposite directions.

UK 2-year gilt yields climbed 16 basis points, while 10-year gilt rates added a similar amount.

Last week, the Bank of England was forced to intervene in the UK bond market to rein in soaring debt costs.

He said he would buy up to £65bn of long-term government debt until October 14. He bought much less than the maximum amount.

Rates are being pushed higher by a combination of investors demanding a higher yield to buy more government debt, UK inflation hitting a 40-year high and expectations of further rate hikes from the Governor of the Bank Andrew Bailey and co.

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