Pound up against dollar as Boris pulls out clearing path for Rishi to become PM
THE pound has has gone up against the dollar after Boris Johnson pulled out of the race to become the next Prime Minister.
Sterling shot up to $1.14 after Boris dropped out of the contest, saying it was “not the right time” for him to stand.
The pound was sitting at around $1.11 on Friday – the day after Liz Truss stepped down as PM just six weeks into the job.
Former chancellor Rishi Sunak is now on course to enter No.10 as soon as Tuesday.
That is unless his other rival Penny Mordaunt manages to drastically improve her supporter base.
Wannabe PMs must have the backing of at least 100 Tory MPs to make the first leadership ballot.
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So far Mr Sunak has 157 while Ms Mordaunt is stuck on 25.
The value of the pound has been a rollercoaster recently, as markets were spooked by political turmoil.
Markets rallied last Monday after Jeremy Hunt ripped up most of last month’s mini-Budget policies.
The Chancellor announced the planned 1p cut to the basic tax rate will be delayed “indefinitely” and said the energy price guarantee would only last until April instead of the planned two years.
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Following these u-turns, the pound was trading 1.3% higher against the dollar to $1.13.
And the pound rallied again on Thursday, shooting up to $1.13 against the dollar, in a damning response to Liz Truss’ resignation.
Why is the pound falling?
The pound is slumping because investors are worried about the huge increase in government debt required to fund the £45 billion of tax cuts and energy support relief for households and businesses.
There were fears about how the mini budget’s massive tax cuts would be funded and a lack of official costing didn’t help.
A huge increase in public borrowing also comes at the worst possible time as government debt has become much more expensive.
Is there any other driver?
The pound had already been falling against the dollar this year because of worries about rising prices (inflation) caused by the energy crisis.
The Bank of England has been widely criticised in not being aggressive enough at raising interest rates to tackle runaway inflation, including last week when it lifted them by 0.5% to 2.25%, below what the market expected.
What does a weak pound mean for me?
It’s a blow for anyone buying holiday cash now as you’ll get fewer dollars for each pound you exchange.
If the value of the pound versus the dollar is $1.05/£1 then for every £100 you change up, you get £105 dollars.
That means buying anything abroad seems more expensive, and can impact on what you can afford to do on your holiday.
There are some steps you can take to make your travel money go further.
These are specific debit and credit cards designed for using abroad, which won’t charge you for each transaction like a standard card will.
In the coming weeks shoppers will face higher prices because British companies import goods in dollars, particularly fashion, electronics and ingredients and will have to pass that on.
Energy bills will keep rising because despite gas and oil prices falling, the market is priced in dollars.
The boss of Carlsberg Martsons, Paul Davies, has warned that pints of beer could also get more expensive because brewers import hops from overseas.
The weak pound is also hitting drivers in the pocket, despite petrol prices falling.
Oil is priced in dollars and the weak pound has already added almost a fiver more to a tank of fuel when filling up at the pumps, according to the AA.
Further action by the BoE to increase rates could impact the cost of borrowing, including loans, credit cards and mortgage repayments more expensive.
It means more misery for households who are already grappling with a cost of living crisis.
A weaker pound can also have an impact on 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.
What’s the upside?
The UK could become a hotbed for overseas investors who will take the opportunity to invest in assets at cheaper prices.
British services will also be more attractive to export, because it’ll be more competitive.
Tourism could also get a boost from shoppers and visitors wanting a bargain.
When are we going to get out of this?
It depends if the Bank of England acts and raises interest rates to try and support the pound.
It only happened before in the 1990s, but that was when the pound was part of the exchange rate mechanism and interest rates were pushed higher to 15 per cent.
The Chancellor’s mini budget is designed to be pro-growth and if more investors buy into the idea that it will help bounce Britain out of recession faster than its European rivals, the pound could strengthen again.
Will the Bank of England raise rates?
A weak pound could also mean more action from the Bank of England (BoE), which has already increased rates in a bid to tackle soaring inflation.
A further rate rise is expected from its next planned meeting in November.
But further intervention could mean appealing for calm or an unscheduled rate rise.
Any such move would take us back to the 1990s of the Bank of England trying to prop up the Pound.
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The Bank of England declined to comment on the nature of any intervention.
The central bank has already hiked the base rate six times this year.