Dollar wise, pound foolish

On Monday, the British pound fell to $ 1.03 before regaining ground to end the day at $ 1.08. This was precipitated by Chancellor of the Exchequer Kwasi Kwarteng's pledge of extra tax cuts on top of the 45-billion-pound plan given, amid concerns that borrowing would grow and markets speculated on an emergency interest rate hike. The cost of UK Government borrowing has risen once more. Borrowing rates over two and five years reached 4.5 %, the most since the 2008 financial crisis, while rates over 10 years reached the highest since April 2010.

Markets have determined that Kwarteng's tax cuts will raise interest rates and that a worsening in the public finances will jeopardise the UK's long-term growth prospects. Under the plans, which he hailed a “new era” for the economy, income tax and the stamp duty on home purchases will be cut and planned rises in corporation taxes have been scrapped. 

According to some analysts, the Bank of England may call an emergency meeting this week to raise interest rates in order to stop the pound's drop and reduce high inflation. If accurate, it would happen less than a week after the Bank boosted interest rates by half a percentage point to 2.25 % and before its November meeting. The Bank of England did not respond.

Interest rates are expected to reach 5.5 % or higher by next spring, according to market participants. The rate increase in September was the ninth in a row, raising rates to their highest level in 14 years. A further increase would increase the monthly mortgage payments of millions more Americans. Furthermore, if the pound continues weak against the dollar, imports of products priced in dollars, such as oil and gas, will become more costly, producing imported inflation on this side of the world. Other imported items may also become substantially more expensive, aggravating inflation, which is already at an all-time high.

Every day, enormous quantities of foreign money are traded by investors all across the world. The rate at which investors move money influences customers' bank, post office or international exchange rates. Many individuals do not think about currency rates until they need to exchange money for a foreign trip. Traveling abroad will become more expensive if the pound buys less local money. British travellers to America will realise that their money does not go as far as it did before the pound's depreciation.

While fears about the UK economy have weighed on the pound, the dollar's growth has also had an influence on its value. Other currencies have been falling against the dollar, with the euro hitting a record 20-year low against the US currency due to recession worries. Technology products manufactured in other countries, such as iPhones, may become more expensive in UK stores. Even items created in the UK but using imported parts might become prohibitively costly.

The dollar has also done well versus the currencies of other countries, being less exposed to high energy prices caused by the Russian invasion of Ukraine. As such, the greenback continues to be considered a safe haven for investors. Since the beginning of the year, just 24 have exceeded it. The pound, on the other hand, has plummeted more than 20% versus the dollar this year, placing it among the 20 worst-performing currencies, among which the rupee too, is placed. 

The euro has also plunged 15% versus the dollar over the same time span, with the two currencies trading at the same value this year for the first time in more than two decades. Over the same time span, the pound has fallen versus the euro.