Sterling collapses as investors fly into dollars

SYDNEY, Sept 26 (Reuters) – Sterling fell to a record low on Monday, fueling speculation of an emergency response from the Bank of England as confidence faded in Britain’s plan to bail out of trouble, with spooked investors piling into US dollars.

Growing concerns that high interest rates will hurt growth also hit Asia’s currencies and stocks, with exporters from Japanese carmakers to Australian miners hit hard.

The pound plunged nearly 5% at one point to $1.0327, breaking below 1985 lows. The moves were boosted by thinner liquidity in the Asian session, but even after stumbling back to $1.05, the currency is still down around 7% in just two sessions.

“You have to buy the dollar as a non-trade risk. There is nowhere else to go,” Rabobank strategist Michael Every said in Singapore.

“The BOE is bound to step in today and then everyone will end up with massively higher mortgage rates to try and stabilize sterling.”

The collapse sent the dollar broadly higher, hitting multi-year highs on the Aussie, kiwi and yuan and a fresh 20-year high of $0.9528 per euro.

In stocks, MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was down 1% to a two-year low. That’s on course for a monthly loss of 11%, the biggest since March 2020. Japan’s Nikkei (.N225) fell 2.2%.

S&P 500 futures fell 0.5 percent.

Last week, stocks and bonds fell after the United States and half a dozen other countries raised interest rates and forecast pain ahead. Japan intervened in currency trading to support the yen. Investors lost confidence in Britain’s economic leadership.

The Nasdaq (.IXIC) lost more than 5% for the second straight week. The S&P 500 (.SPX) fell 4.8%.

Gilts saw their heaviest sell-off in three decades on Friday, and on Monday sterling hit a 37-year low of $1.0765 as investors expect planned tax cuts to stretch government finances to the limit.

Sterling is down 11 percent this quarter.

Five-year gilt yields rose 94 basis points last week, by far the biggest weekly jump recorded in Refinitiv data dating back to the mid-1980s. Government bonds also fell last week, with two-year yields up 35 basis points to 4.2140% and benchmark 10-year yields up 25 basis points to 3.6970%.

The euro wobbled to a two-decade low of $0.9660 as the risk of war escalation escalated in Ukraine, before settling at $0.9686.

In Italy, a right-wing alliance led by Giorgia Meloni’s Brothers of Italy party was on course for a clear majority in the next parliament, as expected. Some took heart from a middling performance by Eurosceptics The League.

“I expect a relatively small effect considering that the League, the party with the least pro-European stance, seems to have come out weak,” said Giuseppe Sersale, fund manager and strategist at Anthilia in Milan.

Oil and gold stabilized after falling against a rising dollar last week. Gold hit a more than two-year low on Friday and bought $1,643 an ounce on Monday. Brent crude futures were at $86.29.

Additional reporting by Danilo Masoni in Milan; Editing by Sam Holmes

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