However, it remains well above the extraordinary depths of $1.068 plumbed a year ago in the wake of Liz Truss’s fiscal statement. Then, a bond market crunch took hold and shook confidence in Britain.
This time around, it is not so serious. However, the weaker currency threatens to add to inflationary pressures and could make it harder for Rishi Sunak to meet his goal of halving inflation by the end of the year.
Why is the pound so weak?
Much of it comes down to interest rates. Rising interest rates draw in money from around the world as investors seek higher returns, pushing up the currency.
The pound peaked against the dollar in July when the Bank of England was raising borrowing costs rapidly and markets thought the Federal Reserve, in the US, was about to end its run of increases. Investors shifted their investments from dollars to sterling as a result.
In July, investors believed the Bank of England was on track to take interest rates to 6pc by the end of 2023.
However, signs of a cooling job market since then and a surprise fall in inflation last month have forced traders to tear up their assumptions.
Last week, the Bank held rates unchanged for the first time in almost two years and the markets now believe borrowing costs have peaked at their current level of 5.25pc.
The pound dropped sharply after the Bank’s latest decision and has fallen further since.
Sandra Horsfield, economist at Investec, says these changing forecasts for interest rates have caused “a good part of this overall underperformance of sterling”.
“It wasn’t long ago that markets were still pricing almost 6.5pc as the terminal level of Bank rate,” she says. “That has come right back down, and has represented a much bigger re-pricing of interest rate expectations than elsewhere.”
However, the pound’s weakness is also being driven by the strength of the dollar. The euro, which is unperturbed by the actions of the Bank of England, has also fallen to a six-month low against the greenback, indicating the worldwide strength of America’s currency.
