After weeks of falling against the dollar, the pound experienced a new low against the dollar on Monday morning, taking it to its all-time low and bringing it to its lowest level in decades.
It has been 37 years since British tourists taking vacations in the United States and British businesses importing goods into the UK received such a pitiful amount of value for their pound.
It reached a low of 1.1443 dollars per pound for a brief period of time, which is lower than the 1.14506 dollars per pound it reached on March 19, 2020.
Due to the fact that the majority of international trade is conducted in dollars, the decline will result in a significant increase in the cost of imports for people living in the United Kingdom.
In 1985, when sterling had last been lower, governments worked together to artificially weaken the dollar against its international rivals, particularly the German deutsche mark and the Japanese yen. This was done in an attempt to promote economic growth in developing nations.
The G5 nations of Germany, the United Kingdom, the United States of America, France, and Japan came to an agreement in the so-called Plaza Accord to work toward depreciating the dollar. This agreement was named after the hotel in New York City where it was signed.
The rapid appreciation of the US dollar over the previous five years was detrimental to the competitiveness of American manufacturers since it reduced the price that domestic consumers had to pay for imported goods.
An expert at Markets.com named Neil Wilson predicted that this time around, there would be no Plaza Accord to come to our rescue.
The announcement of the new leader of the Conservative Party will take place later on Monday, and all eyes will be on it. This could result in additional selling pressure on the pound, but one analyst believes that the selection of Liz Truss could result in a temporary increase in price.
According to Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, “We could see some profit taking and a’sell-the-fact’ bounce in sterling when it is confirmed that Liz Truss has won,”
On the other hand, she claimed that the longer term effects of Ms. Truss’s leadership are likely to be detrimental to the value of sterling.
According to Ms. Ozkardeskaya, she has the ability to shift the focus of the Bank of England away from containing inflation and toward fostering economic expansion.
As the dollar maintains its steady ascent, it is anticipated that the pound will keep moving closer and closer to reaching its goal of parity with the US dollar.
“The pound is projected to continue its trip toward parity against the US dollar, as the dollar continues growing relentlessly,” she added. “Parity” refers to a situation in which two currencies have the same value.
Fiona Cincotta, a senior financial markets analyst at City Index, made the following prediction just before the pound fell to its nearly 40-year low: “Foreign Secretary Liz Truss is anticipated to take over at the helm.”
“However, the fact that the pound is currently trading at its lowest level since March 2020 indicates that the market is concerned about her policy of reducing taxes in order to supercharge the economy.
“There is a good chance that this may backfire and cause inflation to rise much worse.”
On the same day, the value of the euro fell below one dollar for the first time in twenty years, which occurred on Monday.
This comes at a time when economies all across Europe are being pummeled by skyrocketing gas and power prices as a result of the conflict in Ukraine as well as a number of other causes.