What U.K. Pound Sterling Slump Against U.S. Dollar Means for Americans

The British pound plummeted to a new record low against the U.S. dollar on Monday, after the U.K. government announced the most significant tax cuts in 50 years while boosting spending at the same time.

The pound has been under pressure due to the strength of the dollar after it plunged nearly 5 percent to $1.035, its lowest since 1971.

The slide followed as trading opened in Asia and Australia, extending the already 2.6 percent dive from Friday, before regaining some ground to stand at around $1.07.

The euro dropped to a 20-year-low against the dollar amid investor concerns about the risk of recession this winter with no sign of an end to rising energy costs or the war in Ukraine.

Pound Slumps to Record Low
The pound has fallen to a record low against the dollar amid a fresh investor rush towards the US dollar globally. On Monday, the pound hit its lowest mark since 1971, trading at $1.03. Getty

The dramatic decline, sparked by the British Chancellor of the Exchequer Kwasi Kwarteng's promise for further tax cuts on top of a £45 billion ($47 billion) package, has raised concerns that the pound could plunge to parity with the US dollar in the coming months.

On Friday afternoon, Bloomberg's options pricing model showed there was a 26 percent chance of the pound and the dollar hitting parity within the next six months, up from a 14 percent chance on Thursday.

Investors are now looking for a response from the Bank of England, as experts warn that the radical economic policies of Kwarteng's mini-budget have threatened to undermine confidence in the U.K.

George Saravelos, global head of foreign exchange research at Deutsche Bank, said that "investor confidence is being eroded fast," and called for an emergency interest rate hike from the Bank of England.

Following the mini-budget announcement, investors rushed towards the U.S. dollar - a safe haven investment that generally sees inflows in times of uncertainty.

"The poor situation in the U.K. exacerbates support for the USD, [which] can track higher again this week," Joseph Capurso, head of international economics at Commonwealth Bank of Australia, wrote. "If a sense of crisis about the world economy were to emerge, the USD could jump significantly."

Focus later in the day will turn to politicians' and policymakers' response to the plunging pound, and to the latest round of dollar strength, it has unleashed.

The significant drop in the pound's value is good news for exchange rates and imports to the U.S., which currently imports around $5.9 billion worth of goods.

As the pound weakens, U.K. imports will become cheaper as the U.S. is able to purchase foreign goods for almost the same amount as American goods.

This means that buying goods from the U.K. becomes cheaper overall as the pound falls in value.

A weaker pound could also potentially lead to a rise in the Financial Times Stock Exchange 100 Index (FTSE 100), an index of the 100 companies with the highest market capitalization on the London Stock Exchange.

Around 70 percent of FTSE 100 company revenues come from overseas businesses and trade, with a large proportion of that revenue denominated in U.S. dollars.

When the pound falls in value, those dollars are able to buy more pounds, making those revenues more valuable in the short term.

The exchange rates also mean that travelers to the U.K. will see a better return on their spending, with conversions for currency jumping from a low of £0.88 to the dollar, to £0.93 to the dollar.