The British pound hit a record low on Monday, while the euro fell to a 22-year trough as growing concerns over worsening economic conditions in Europe saw the dollar flush with safe-haven trades.
The pound fell as much as 5% to a lifetime low of $1.0384, with doubts over the UK’s fiscal stability growing after the country announced extensive tax cuts in the face of a looming recession.
UK Chancellor Kwasi Kwarteng last week unveiled the country’s biggest package of tax cuts in 50 yearsto support laggard economic growth. But markets were doubtful over the sustainability of such a move, given that the country faces slowing growth and twin deficits.
Data on Friday also showed that UK business activityshrank in September for a second consecutive month. The Bank of England, which recently hiked interest rates, also warned that the UK economy may already be in recession.
The euro slumped 0.5% to a new 22-year low of $.09643. A batch of weak Eurozone economic readings last week saw investors pricing in a likely recession in the bloc. Fears of a brewing energy crisis and a potential escalation in the Russia-Ukraine war also dented sentiment towards the currency.
High inflation has been the biggest headwind for UKand Eurozone economies this year, as both business and consumer spending wilted under increased price pressures.
Weakness in the pound and the euro saw the dollar index touch a new 20-year high on Monday, as the greenback continued to benefit from safe-haven buying. Rising U.S. interest rates have greatly boosted the reserve currency this year, and are likely to keep it elevated in the near term.
The Federal Reserve also signaled last week that U.S. interest rates are set to rise even further this year, likely ending 2022 at a 16-year high of 4.4%.
