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British Pound Touches Record Low as Investors Dump U.K. Assets

The market’s resounding rejection of the new British government’s plans for tax cuts and borrowing continued Monday as the pound briefly fell to its weakest level against the U.S. dollar on record.

After a historically bad day on Friday, the British currency plunged as low as $1.035 in the early hours of Monday morning, before recovering to about $1.08, down 0.5 percent for the day. It also weakened slightly against the euro.

On Monday, prices for British government bonds plummeted, and yields surged, sending borrowing costs to new highs. The 10-year yield, which influences mortgages, business loans and other types of debt, hit it highest level in more than a decade. It traded at around 4.15 percent on Monday, double the rate from just over a month ago.

As traders dumped British assets, analysts have said the government’s plan to quickly grow the economy through deregulation and tax cuts, which will require tens of billions of pounds in additional borrowing at a time of rising interest rates and high inflation, was a gamble.

On Friday, Kwasi Kwarteng, who has been chancellor of the Exchequer for about three weeks in prime minister Liz Truss’s new government, announced a series of cuts to income taxes, reduced levies on home purchases and scrapped a plan to increase the corporate tax rate. There were dozens of other policy measures, which come on top of an expansive, costly plan to cap the cost of electricity and gas for households and businesses.

Despite the breadth of new measures, the government did not have the Office for Budget Responsibility, an independent watchdog, assess the polices and provide updated economic and fiscal forecasts.

“It was perhaps the lack of reassurances about fiscal responsibility that tipped the market over the edge,” said Jane Foley, a strategist at Rabobank.

On Sunday, government officials projected confidence in their tax-cutting agenda, despite the market’s negative reaction to the initial plans. Mr. Kwarteng said there would be “more to come” in his drive to have “people retain more of their income.”

The steep decline in the pound has lead some analysts and economists to speculate that the Bank of England may need to intervene by raising interest rates before its next scheduled policy meeting in November.

“All sterling traders this morning will be sitting on the edges of their seats,” said Ms. Foley, referring to the moves in the British pound. “This is a very uncomfortable position, particularly for the Bank of England and, of course, for the government too.”

The government’s plans have been criticized for pulling too far in the opposite direction to the goals of the central bank. Policymakers at the Bank of England have been raising interest rates in an effort to bring down inflation, which is near a 40-year high. But the government’s policies could add to longer-term inflation pressures if people spend the savings on tax and energy bills and the measures don’t sufficiently grow the supply side of the economy. This has added to bets that the central bank will have to raise interest rates even higher than previously thought.

Analysts at Barclays said they expected the central bank to increase rates by three-quarters of a percentage point in November, instead of half a point, after the government surprised investors with “more tax cuts than expected and little reassurance on how the books will eventually be balanced.”

The market is facing a larger supply of British government debt, after the Bank of England last week announced a plan to start selling bonds it holds back to the market just before the government significantly increased the amount of bonds it planned to sell this year to fund its policies.

For weeks, analysts have been warning of trouble for the British pound. Britain’s record-high current account deficit, which means that the value of imported goods and services exceed it exports and other income from overseas investments, means that the country relies on the generosity of international investors. But these investors could lose confidence in Britain.

“The government does appear extremely chaotic right now,” Ms. Foley said. “The markets don’t believe that their policies are going to be good for the U.K. economy. Unless it can pull something out of hat to enhance its credibility then sterling is going to remain pretty vulnerable.”