Pound sterling: 2023 could be another torrid year as it tumbles to November low against US dollar
The pound has tumbled to its lowest level against the US dollar since November, pushed down by investors on both sides of the Atlantic betting the Federal Reserve will keep raising interest rates aggressively this year.
The currency dropped a shade over 0.2 per cent to $1.19 this morning, leaving it trading at pre-Christmas levels.
Sterling is on course to notch a weekly loss of more than 1.6 per cent, extending last year’s dismal decline into 2023.
The pound was battered last year by a combination of Fed chair Jerome Powell and the rest of the federal open market committee and shaky UK tax and spending plans.
Not so sterling… Pound/US dollar exchange rate over last year
Soaring prices in the world’s biggest economy forced the central bank to rush out a series of jumbo rate hikes, including four back-to-back 75 basis point jumps.
Inflation peaked at 9.1 per cent in June, but has since dropped to a little over seven per cent, raising hopes the rate of price increases has passed its peak and will fall slowly this year.
Higher borrowing costs, in theory, are supposed to tame inflation by cooling demand through making it more attractive to save and more expensive to borrow.
The Fed raced ahead of its global central banking peers last year. While the Bank of England lifted rates eight times in a row to 3.5 per cent and the European Central Bank launched its first hike in more than a decade, borrowing costs are higher in the US.
As a result, traders can bag a better return on US assets, prompting people to hoover up dollars to buy American debt, sending the greenback on a year-long rally.
According to the Wall Street Journal’s dollar index – which measures the greenback against a basket of the world’s top currencies – the dollar strengthened nearly 10 per cent over the last 12 months.
While the dollar scrambled ahead of the euro and other top currencies, the pound had more downward pressure heaped on it by former prime minister Liz Truss’s botched mini-budget.
Her £45bn of unfunded tax cuts rocked financial markets, prompting investors to ditch sterling. The pound briefly kissed a record low against the greenback in the aftermath.
The euro has also kicked off 2023 in poor style. Earlier this week, it notched its worst day of trading since September. It was down 0.05 per cent against the dollar today.