Pound drops to lowest level against dollar since 1985

The pound has slipped to a new 37-year-low against the dollar after a rally for the US greenback while UK investors swallowed the prospect of mammoth borrowing to fund a package to deal with soaring energy bills.

Sterling dipped as low as 1.1403 dollars on Wednesday afternoon, surpassing the trough of 1.1412 seen at the outset of the Covid-19 pandemic in March 2020.

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.

The dollar has also closed in on a 20-year-high against the euro.

Andrew Bailey, governor of the Bank of England, highlighted the strength of the US currency during a Treasury Select Committee meeting earlier on Wednesday, as he explained to MPs the recent weakness in the pound.

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 also 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 energy plans, which are due to be announced on Thursday.

The fears of increased borrowing also pushed benchmark gilt yields beyond 3%, to the highest in around 11 years.

Confidence in the pound was also weakened after Huw Pill, chief economist at the Bank of England, told MPs that Prime Minister Liz Truss’s touted energy support for households could reduce inflation compared with previous forecasts.

The central bank previously predicted inflation could pass 13% in October.

However, the potential tempering of inflation expectations could mean reduced action over interest rates by the Bank.