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The pound fell to its lowest level since November 2023 on Thursday, as the UK currency was swept up in bond sales that threaten to derail the Labor government's fiscal plans.
In early trading in London, the pound weakened 0.8 percent to $1.2269 as investors braced for another volatile day in the gilt market.
The currency has been hit by problems in the bond market as investors worry about government borrowing needs and the growing threat of inflation, compounding the lack of growth and persistent price pressures.
“The economy is entering stagflation,” said Mark Dowding, chief investment officer at RBC Bluebay Asset Management.
Sterling was also hurt by the rebound in the dollar, which strengthened as a string of recent US data boosted investor confidence in the world's largest economy.
The dollar index, which measures the currency against a basket of six peers, was up 0.1 percent on Thursday.
Chancellor Rachel Reeves has left herself £9.9bn less headroom against her revised financial rules in the Budget even after announcing a £40bn tax hike aimed at “wiping the slate clean” on public finances.
A rise in government debt yields since then puts that budget leeway at risk. The level of bond yields is an important determination of the house budget given its impact on the government's interest bill, which is more than £100bn a year.
On Wednesday UK 10-year borrowing costs rose to their highest level since the global financial crisis. Analysts said Wednesday's simultaneous sell-off in gilts and the pound carried echoes of the response to Liz Truss' Budget 2022.