Pound falls to lowest level since 2023 – what does it mean for your money?
THE pound has dropped to its lowest level against the US dollar since November 2023.
It follows a sharp increase in UK government borrowing costs which hit a 27 year high earlier this week.
The fall has seen £1 worth less than $1.23 for the first time in more than a year.
It’s a blow for anyone buying holiday cash now as you’ll get fewer dollars for each pound you exchange.
The falling value of the pound is directly linked to the rising cost of government borrowing.
When the government needs to borrow money, it issues bonds, often referred to as gilts.
The interest rate on these bonds is known as the yield.
Currently, these yields are rising, making borrowing more expensive.
The yield on 10-year gilts, for instance, has climbed to 4.89%, its highest level since August 2023, while the yield on 30-year gilts is at its highest since 1998, reaching 5.39%.
The increase in the 10-year gilts are particularly concerning as they are the benchmark for high street banks to set mortgage rates and other borrowing costs for Brits.
On paper, higher yields should make bonds more attractive to investors.
And if investors buy lots of bonds, they need to buy pounds to do so, which normally increase the pound’s value.
However, that’s not what’s happening right now.
The rising yields are actually making investors more worried about the UK economy.
They fear the government might be struggling financially and that the UK could be heading for “stagflation” – a period of slow economic growth and high inflation.
This makes the UK a less desirable place to invest.
As a result, investors are selling pounds rather than buying them, which pushes the pound’s value down.
It’s a bit like what happened after Liz Truss’s mini-budget in 2022, when the pound dropped sharply due to investor concerns about the government’s fiscal policies.
What are gilts?
GOVERNMENT bonds, or gilts, are seen as the telltale sign of global investors' opinion on the health of the UK economy and its leadership.
They also shape investors’ views on whether a Budget has been a success or failure.
Gilts are issued by the Government as parcels of debt that pay out a return — or coupon — to investors over a fixed term, such as five, 10 or 30 years.
The yield reflects the amount of interest paid, and increases when the price of a bond falls to reward the investor for the risk of holding a cheaper asset.
Yields increase when the price of a bond falls because investors want bigger returns for owning a riskier asset.
Economists are warning that Chancellor Rachel Reeves may need to raise taxes or cut government spending to meet fiscal targets.
The increased cost of paying interest on government debt is shrinking the government’s available funds, raising concerns about the UK’s long-term financial stability.
While the rapid sell-off of government bonds has slowed slightly, the pound’s continued weakness reflects ongoing market anxieties.
Kathleen Brooks, research director at XTB, said while still under pressure, the pace of the “relentless” bond sell-off had eased on Thursday.
But she stressed the pound’s reaction shows ongoing concerns in the market.
She said: “The UK’s fiscal position continues to look perilous.
“The Chancellor is expected to make a speech in the coming days, where she may focus on public sector spending cuts rather than further tax increases to meet her fiscal rules.
“However, the rhetoric from the Labour government is one reason we are in this mess in the first place, and there are no guarantees that Reeves will be able to calm the market.”
After the Autumn Budget, Ms Reeves was left with only £9.9billion of headroom to meet her revised fiscal rules. This came despite a £40billion package of tax increases to fuel higher spending.
Higher debt interest costs may mean the Chancellor would need to trim spending plans or bring in more revenue than expected to meet the fiscal rules.
The Chancellor committed last year to having only one fiscal tax-changing event a year, which is expected in the autumn, leaving many to expect that she will opt to rein in spending plans in her March fiscal statement.
What does this mean for my money?
A fall in the value of sterling is bad news for holidaymakers, who will find they get less travel money at the Foreign Exchange.
If the value of the pound versus the dollar is $1.30/£1 then for every £100 you change up, you get £130 dollars.
If the pound to dollar exchange rate drops to $1.23/£1 then you’ll only get $123 for £100 holiday spending money.
That means buying anything abroad seems more expensive and can impact what you can afford to do on your holiday.
You can take some steps to make your travel money go further.
Ordering your cash online in advance will help avoid a last-minute rush at the airport, where the exchange rates are typically much worse.
TravelMoneyMax at moneysavingexpert.com can help you compare rates from different bureaux de change.
Overseas spending cards mean you don’t have to worry about carrying wads of cash, too.
A weaker pound can also impact the value of your pension or any investments you might have.
This is because if you hold shares in a company based overseas, their value is affected by currency movements.
If you notice a dip in the value of your investments, it’s best not to panic or be tempted to sell.
Elevated inflation rates, which rise above the Bank of England‘s 2% target, could deter it from reducing interest rates in the near future.
This could be painful for mortgage holders waiting to remortgage, hoping for sooner rate cuts.
Why does inflation matter?
INFLATION is a measure of the cost of living. It looks at how much the price of goods, such as food or televisions, and services, such as haircuts or train tickets, has changed over time.
Usually people measure inflation by comparing the cost of things today with how much they cost a year ago. The average increase in prices is known as the inflation rate.
The government sets an inflation target of 2%.
If inflation is too high or it moves around a lot, the Bank of England says it is hard for businesses to set the right prices and for people to plan their spending.
High inflation rates also means people are having to spend more, while savings are likely to be eroded as the cost of goods is more than the interest we’re earning.
Low inflation, on the other hand, means lower prices and a greater likelihood of interest rates on savings beating the inflation rate.
But if inflation is too low some people may put off spending because they expect prices to fall. And if everybody reduced their spending then companies could fail and people might lose their jobs.
See our UK inflation guide and our Is low inflation good? guide for more information.