UK: Pound hits record low versus dollar, markets drop on recession fears

On Monday, the pound hit a record low against the dollar, amidst surging fears about the UK economy after the government unveiled a huge tax-cutting budget.

The sell-off comes as most equity markets across Asia fell again, owing to a growing expectation that central bank interest rate hikes to fight runaway inflation, would lead to deep and painful recessions.

Officials in several countries — including the United States, Britain, Switzerland and Sweden — unveiled more increases in the cost of borrowing.

The moves sent equity markets deep into the red again, after officials reiterated their focus on fighting inflation — even if that meant causing a recession.

The biggest casualty of the week was the pound, which fell below $1.10 for the first time since 1985, as new finance minister Kwasi Kwarteng announced his controversial mini-budget.

It then extended the losses on Monday to an all-time low of $1.0350 in Asian trade, after he said he intended to unveil further reductions, despite his budget causing ructions on London's markets.

It also fell to a two-year low against the euro, though the single currency remains under pressure against the dollar, sitting at 2002 levels.

Now, observers are warning that the pound could fall to parity with the greenback.

Kwarteng — who was installed by Liz Truss after she became prime minister earlier this month — said he planned to slash taxes to kick start the British economy, and provide cash to cushion families from rocketing energy costs.

Investors were spooked by the huge amount of borrowing likely needed for the multibillion-pound package, which critics said would benefit the rich far more, during a cost-of-living crisis.

"Whether or not the UK government announcement of the biggest tax reduction since 1972 ... will in time yield a significant growth dividend is not something markets are yet willing to contemplate," said National Australia Bank's Ray Attrill.

"Instead, they were consumed by worries over the scale of near-term UK government financing needs, at a time when the current account deficit is running at more than eight per cent of GDP ... Chatter about a possible UK sovereign rating downgrade has already begun," he added.

The former US treasury secretary Lawrence Summer was critical of Britain's recent monetary policy decisions.

"It makes me very sorry to say, but I think the UK is behaving a bit like an emerging market turning itself into a submerging market," he told Bloomberg Television's Wall Street Week, last week.

Oil prices edged up slightly, though it barely made a dent in the big losses suffered Friday, as expectations that a recession is looming hammer demand expectations.