Liz Truss Gets Unwelcome Margaret Thatcher Comparison With Pound At 1985 Low

On her first full day on the job, UK Prime Minister Liz Truss has managed to evoke the memory of Margaret Thatcher in at least one regard: the sterling-dollar exchange rate.

The pound slid as much as 1 per cent in Wednesday trading to $1.1406, the lowest level since 1985, when Truss's role model was midway through her 11-year stint in power. 

Then as now, the slump is predominantly a story of dollar strength, but it also underscores the challenges faced by the new UK government as it grapples with double-digit inflation and warnings of an deep economic contraction.

“The markets are seemingly relishing the opportunity to bash the British pound,” said Valentin Marinov, head of G-10 currency research at Credit Agricole in London.

While Truss attended anti-Thatcher protests with her left-wing parents as a child, nowadays she regularly invites comparisons with the UK's first female prime minister, from the way she dresses to her policies. Truss named Thatcher her party's best leader at a leadership hustings. 

Concerns about her economic agenda, which has included pledges to review the Bank of England's mandate and run up the budget deficit just as the central bank is raising interest rates, spurred the currency's biggest slide since 2016 last month.

Still, the pound remains stronger against the euro than it was during much of the Brexit negotiations as well as the global financial crisis, and it rebounded from Wednesday's losses to end the day little changed in New York.

UK taxpayers will be on the hook for as much as £200 billion ($230 billion) over the next 18 months to cover the cost of Truss's plans to contain energy prices, according to people familiar with the policy.

Meanwhile, some of her closest supporters are worried that her first moves in office prove to be big mistakes, raising the prospect of political instability. 

The last time the sterling-dollar exchange rate was this low the world's richest nations signed the Plaza Accord, an agreement to weaken the US currency.

The greenback is soaring against its major peers again, compounding sterling's slide and piling pressure on the central bank to keep up with the pace of US interest-rate hikes. 

The expected hit to economic growth combined with a widening trade deficit are weighing on sterling, which has weakened nearly 15 per cent this year.

“Truss's fiscal plans may help households but probably not the pound and the talk about the Bank of England doesn't help,” said Roberto Cobo Garcia, head of G-10 currency strategy at BBVA in Madrid. “Global risk appetite may need to improve somehow to stop the pound carnage.”

Meanwhile Citigroup Inc. strategists Adam Pickett and Benjamin Nabarro advised clients Wednesday to stay short sterling, writing that Truss's plans to freeze energy bills are increasing market concerns over the country's balance-of-payments position.

“The current account is being eroded by high energy prices and Brexit,” as the domestic growth picture remains weak, they said. “This is leading to capital account inflows drying up at a time when the UK needs them the most.”

State Street strategist Lee Ferridge cited a similar line of reasoning for ongoing pound weakness. 

Truss' plans are “going to expand the deficit and it's going to be huge,” Ferridge said Wednesday on Bloomberg TV and Radio's “Surveillance.”

“You got a significant current account deficit in the UK, as well. You can't have twin deficits both over 10 per cent of GDP. That's not a developed-market scenario we are used to.” 

--With assistance from James Hirai, Naomi Tajitsu, Lynn Thomasson, Alice Gledhill, Mary Biekert and Sid Verma.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)