Sterling hits record low against dollar as Treasury chief Kwarteng vows tax cuts

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Sterling hits record low against dollar as Treasury chief Kwarteng vows tax cuts

The British pound fell to a all-time low against the U.S. dollar early Monday after Treasury chief Kwasi Kwarteng pledged a sweeping package of tax cuts, which has raised concerns about the government's policy as the United Kingdom moves toward recession.

The pound fell as low as $1.0373 before rallying to $1.0672 in early London trading. It was its lowest level since the decimalization of the currency in 1971.

The British currency has lost more than 5% of its value against the dollar since Friday, when Kwarteng announced the biggest tax cuts in 50 years.

It comes as the Conservative government plans to spend billions of pounds to help consumers and businesses struggling with high energy bills that are driving a cost-of-living crisis. Kwarteng and Prime Minister Liz Truss, who took office three weeks ago, are betting that lower taxes and reduced bureaucracy will spur economic growth and generate additional tax revenue to cover government spending. The Opposition Labour Party spokeswoman Rachel Reeves said Kwarteng had fanned the flames of instability by talking up more tax cuts and saying the government's policies were reckless. When questioned about his economic policy Sunday, Kwarteng said he believed the government was acting responsibly.

He said there was more to come in an interview with the BBC. We have only been here 19 days. I want to see more people retain more of their income over the next year because I believe that it is the British people who are going to drive the economy. The government wants to cap electricity and natural gas prices for homes and businesses to help cushion price rises that have been caused by Russia's war in Ukraine and have sent inflation to near a 40 year high of 9.9%, as it is cutting taxes.

This program will cost 60 billion pounds and the government will borrow to finance it, Kwarteng said Friday.

He said Sunday that it was the right policy because the government needed to help consumers squeezed by the pressures caused by the war in Ukraine and the COVID-19 epidemic.

Britain can afford the cost because of its debt, as a percentage of gross domestic product, it is the second lowest among the Group of Seven large industrial economies, Kwarteng said. He said that the government will announce plans for reducing the nation's debt in the coming months.

The Bank of England has not kept pace with the U.S. Federal Reserve's efforts to rein in inflation, which has fueled the decline of the pound against the dollar.

Britain's central bank raised interest rates by half a percentage point, compared with a large three-quarter increase by the Fed last week. U.K. inflation is the highest among major economies, and the bank has predicted a recession later in the year.

The pound has risen steadily against the dollar for more than a year as investors seek the security of their U.S. assets amid the economic shocks caused by the Pandemic and the war in Ukraine.

The British currency has fallen more than 24% against the dollar since its recent peak of $1.4181 on May 27, 2021.