British Pound Plunges to Record Low Against US Dollar
The British pound dipped to a record low against the U.S. dollar on Monday, as uncertainty surrounding the U.K. economy grows. The pound dropped to roughly $1.03 Monday and recovered slightly on Tuesday, rising back to $1.07, according to CNN Business.
The pound is faced with the highest level of inflation among G7 nations (Canada, France, Germany, Italy, Japan, U.K, U.S.). "Monday's turbulence follows a 3% fall in the pound Friday, the biggest one-day drop against the U.S. dollar since Johnson announced Britain's first COVID-19 lockdown on March 18, 2020," reads an article from AP News.
The slump comes after an announcement that the U.K. would implement the largest tax cuts in roughly 50 years, boosting government spending amid scorching inflation. But inflation is not the only root cause of the pound's plummet.
Clifford Bennett, chief economist at ACY Securities said any escalation to the Russia-Ukraine war will cause further downside to both the pound and euro. "One should not underestimate the crisis that is all of Europe at the moment and the pound is more vulnerable than most," Bennett told CNN.
The Bank of England raised its key interest rate by a half-percentage point last week to the highest level in 14 years, but said in a statement that it would "not hesitate to change interest rates by as much as needed to return inflation to the 2% target …"
But what does the plummet of the pound mean for the U.S. dollar? The strong U.S. dollar is a win for importers but a lose for many exporters as goods become more expensive to customers in other countries. Most of the world's commodities are prices in dollars, per NPR. That means goods such as soy and oil will become more expensive. "Second, a stronger dollar is a strain on countries that have debt denominated in dollars. Interest payments are going to be more expensive, and so is refinancing," the article reads.