Markets hate Liz Truss’ plan for the UK. Just look at these charts

The British Pound crashed below $1.10 in the mid-afternoon, reaching a new 37-year low against the greenback.

British government bonds also sold strongly. The yield on the 10-year UK Treasury, which moves opposite prices, rose by a quarter of a percentage point – a very big step in the world of bond trading. That drove up borrowing costs. UK equities, as measured by the FTSE 100 (UKX) in London, reached its lowest level since March.

Finance Minister Kwasi Kwarteng said the government would cut income taxes and cancel plans to raise corporate taxes next spring, calling for a “new approach for a new era, focused on growth”. At the same time, he pledged to continue plans to subsidize the energy bills of millions of households and businesses.

But investors aren’t convinced the unconventional approach will actually help the economy, which the Bank of England warned this week was likely already in recession. Some of them called it a huge gamble.

“It is extremely unusual for a developed market currency to weaken while interest rates rise sharply. But this is exactly what has happened since. [Kwarteng’s] announcement,” Deutsche Bank strategist George Saravelos said in a note to customers on Friday.

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Towards parity with the dollar?

One concern is that a substantial increase in government borrowing will be necessary at a time when interest rates are rising rapidly. The Bank of England pushed its key rate to its highest level since 2008 on Thursday, marking the central bank’s seventh rate hike since December.

Lowering taxes, while politically popular, could also stimulate demand and drive up prices, making the central bank’s job of controlling inflation even more difficult.

Former US Treasury Secretary Larry Summers told Bloomberg Television that the pound could even fall below par against the dollar for the first time in its history. (The previous all-time low was just over $1.05 in 1985).

“I’m sorry to say but I think the UK is behaving a bit like an emerging market turning itself into a sinking market,” Summers said. “Between Brexit, how far the Bank of England fell behind and now this fiscal policy, I think Britain will be remembered for having the worst macroeconomic policy of any major country in a long time.”

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The dollar’s breakneck rally as the Federal Reserve takes aggressive steps to curb inflation is adding downward pressure on the UK currency.

“Unless something can be done to allay these fiscal concerns, or unless the economy shows surprisingly strong growth rates, it appears that investors will continue to avoid sterling,” ING’s Antoine Bouvet and Chris Turner said in a research note. “We think the market is under-priced opportunities for parity.”

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