The pound fell below $1.35 for the first time since 14 August as a global bond market sell-off pushed UK borrowing costs to their highest level in years and the dollar strengthened on bets of a Federal Reserve rate rise. The moves add pressure on prime minister Andy Burnham and chancellor John Healey ahead of the 28 October budget.
Sterling slid as UK 10-year bond yields jumped to their highest level since June 2008, intensifying pressure on the government's finances just weeks before the autumn budget.
Gilt yields surge to levels last seen in 2008
UK 10-year bond yields jumped four basis points to 5.268% in early trading, the highest level since June 2008, Reuters reported. The rise cooled later in the session, with yields easing to 5.22%, up two basis points, after earlier trading as high as 5.29%, an 18-year high. 30-year gilt yields are trading at their highest level since 1998, according to BBC News.
Dollar strength drags the pound and euro lower
The US dollar climbed to its highest level against a basket of currencies in over two weeks, pulling the pound below $1.35 and pushing the euro down to $1.1575, its lowest since 18 August. Traders are betting the Federal Reserve is more likely to raise interest rates in September after Fed chair Kevin Warsh warned there would be "work to do" unless inflation eases.
Middle East tensions fuel the sell-off
Joel Kruger, market strategist at LMAX Group, says the jump in oil prices is driving bond yields higher, pointing to renewed escalation between the US and Iran. Brent crude touched $97 a barrel before easing back to $93.83. The higher energy costs are stoking inflation worries, and, according to BBC News, yields have also been rising in the US, Japan and Europe.
Budget pressure builds for Burnham and Healey
The turmoil comes at a sensitive time for prime minister Andy Burnham and chancellor John Healey, who are preparing their first budget on 28 October. Higher borrowing costs erode the government's fiscal headroom, raising the prospect of tax rises or reduced support for households under the UK's self-imposed fiscal rules.
Sources: The Guardian, BBC News
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