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Home BUSINESS Pound falls after Bank of England steps in to prop up gilts

Pound falls after Bank of England steps in to prop up gilts

The pound briefly fell 1% against the dollar on Wednesday before recovering in highly volatile trading after the Bank of England said it would return to the bond market.

The Bank said it will make temporary bond purchases and postpone the planned start of its current sale program.

Sterling was down 0.6% at $1.0675, after hitting a session low of $1.0618. The euro was up 0.3% against the pound after the Bank’s announcement at 89.74 pence.

The bank’s dramatic move came after traders reported a turmoil in the gilt market.

UK government bonds have plunged in recent days after new finance minister Kwasi Kwarteng announced plans to cut taxes and increase borrowing. That sent yields, which move inversely to prices, skyrocketing.

But the bank’s intervention appeared to calm the market on Wednesday, causing the benchmark 30-year yield to be applied lower by more than 50 basis points at one point.

Kwarteng’s tax statement, and his promise that there was more to come, shocked investors and caused the pound to plunge to a record low of $1.0327 on Monday.

Sterling trimmed some of its losses on Tuesday, after Bank of England chief economist Huw Pill suggested the central bank would have to raise interest rates sharply in November.

Kenneth Broux, currency strategist at Societe Generale, said the bank had to step in because “confidence has completely evaporated.”

“The rise in bond yields threatens the housing market and the broader economy. But the BoE has yet to raise the policy rate,” he said.

John Hardy, head of currency strategy at Saxo Bank, said: “All else being equal to this, sterling should be negative.”

Analysts said the dollar’s strength was also weighing heavily on the pound. Investors have rushed to the safety of the dollar this year as the global economy has slowed and market volatility has increased.

The dollar index hit a new 20-year high of 114.78 on Wednesday, rising 0.29% for the last time.

Chris Turner, global head of markets at ING, said: “We are in the really powerful phase of a dollar rally. It is an inopportune time for UK politicians to come up with an unfunded fiscal stimulus package.”

(This story has not been edited by Business Standard staff and is automatically generated from a syndicated feed.)

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