A trader, center, wears a Citigroup jacket as he works on the floor of the New York Stock Exchange.
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The British government has announced the most major tax reduction program for decades on Friday morning, as Finance Minister Kwasi Kwarteng said the Treasury was aiming for a 2.5% growth trend. Britain’s economic growth has been sluggish in recent years, and the Bank of England on Thursday said it was probably in a recession.
However, traders appeared to panic 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 the European energy crisis, with government bond yields up at the highest daily rate in over a decade.
As of 4 p.m. London time on Friday, the pound was down more than 3% against the dollar, marking a new 37-year low at $1.0915. It was the last at this level briefly in 1985when it weakened due to rising U.S. interest rates
Analysts said there is now a significant chance that the currencies will hit parity for the first time in history. The British pound’s all-time low is near $1.05.
Citi’s Vasileios Gkionakis said he expects the pound to trade in a range of $1.05 to $1.10 over the next few months, but the risks of a breakout lower, towards parity, had increased.
“We believe the UK will find it increasingly difficult to finance this deficit in a deteriorating economic environment; something has to give, and something will end up being a much lower exchange rate,” he said. he stated in a research note.
Antoine Bouvet and Chris Turner of Dutch bank ING said currency options now put the odds of a dollar-pound parity by the end of the year at 17%, down from 6% at the end of June.
“Given our preference for the dollar rally to also get carried away, 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 climbed 1.8% against the pound to 0.8890.