LONDON (Reuters) - A stronger U.S. dollar sent the British pound to its lowest in weeks on Wednesday after Federal Reserve Chair Jerome Powell delivered remarks in which he said an “extended period” of weak growth may be in store for the United States.
Powell said the central bank won’t implement negative interest rates, but warned that “it will take some time to get back to where we were,” pushing the safe-haven dollar higher.
Lacking substantial reasons to hold the pound, traders pushed it to a six-week low of $1.2224. It also fell by the same extent against the euro, touching 88.77 pence, its lowest since April 1.
Sterling remained vulnerable as traders weighed the benefit of government support to shield the economy from the COVID-19 pandemic against the high financial costs of doing so.
On top of that, Britain’s economy shrank by a record 5.8% in March as the coronavirus crisis escalated and the government shut down much of the country.
Graphic: Britain GDP shrinks massively - here
“Nobody runs in to take the other side of these moves ever at the moment,” said Kit Juckes, macro strategist at Societe Generale.
The pound has lost 2.8% of its value against the dollar so far this month, making it the biggest underperformer among the major currencies. Still, the pound was far off its March lows, when it sank to $1.14, its weakest in decades.
Graphic: Sterling weak in May - here
Britain on Tuesday extended its job retention scheme, in which the government pays 80% of furloughed workers’ wages, by another four months until the end of October. But analysts estimate it will cost the government billions to fund this scheme, which will then likely lead to higher debt and taxes.
Ministers will have to raise taxes sharply in the coming months to deal with an estimated 337-billion-pound deficit in the current financial year, according to a leaked Treasury document, the Financial Times reported on Wednesday.
“While the additional support for employment is welcome, the cost could quickly start to weigh on investor sentiment especially if second COVID waves emerge going forward,” said Derek Halpenny, head of research at MUFG.
The scheme is estimated to cost 49 billion pounds ($60 billion) through to June, and an additional 30 billion pounds to run it through October, he added.
Reporting by Olga Cotaga; Editing by Pravin Char, William Maclean and Alexandra Hudson