By Dhara Ranasinghe
LONDON (Reuters) - Sterling crashed to a record low early on Monday as traders rushed for the exits on mounting concern that the new government's economic plan will stretch Britain's finances to the limit.
The British pound's searing drop helped lift the safe-haven U.S. dollar to a new two-decade peak against a basket of major currencies, while the euro hit a fresh two-decade low against the greenback.
In Japan, authorities reiterated that they stood ready to respond to speculative currency moves, after they intervened last week to bolster the yen for the first time since 1998.
But it was sterling's slide that rippled across markets, down as much as 4.9% to an all-time low of $1.0327.
The pound recovered ground during the London session but was still down 1.5% at $1.0689, while British gilt prices collapsed on speculation that the Bank of England might need to take emergency action to stem the fall in sterling.
Graphic: Sterling reached an all-time low against dollar https://graphics.reuters.com/BRITAIN-STERLING/xmpjozgklvr/chart.png
The pound had already fallen 3.6% on Friday, when new finance minister Kwasi Kwarteng unveiled historic tax cuts funded by the biggest increase in borrowing since 1972. Kwarteng on Sunday dismissed the currency's freefall, saying his strategy was to focus more on longer-term growth.
Sterling was also down 1% against the euro, having hit its lowest since September 2020 at 92.60 pence.
Kit Juckes, head of currency strategy Societe Generale (EPA:SOGN) in London, said markets had a tendency to overshoot but made two points about sterling's slide.
"One is the loss of confidence in UK fiscal policy and that won't help sterling," he said. "The second is that the mini budget has allowed sterling to be the short of choice against the dollar."
The euro also touched a fresh 20-year trough at $0.9528 and was last down 0.5%. As the pound's slide rippled across markets, Sunday's election in Italy, in which a rightist bloc looked set for a solid majority, appeared to have little immediate impact.
DOLLAR STRONG
The dollar firmed 0.52% to 144.09 yen, heading back toward Thursday's 24-year peak of 145.90. It sank to around 140.31 that same day after Japan conducted yen-buying intervention for the first time in more than 20 years.
Japan is estimated to have spent about $25 billion in that dollar-selling, yen-buying intervention, according to estimates by Tokyo money market brokerage firms.
And the dollar index - where the basket includes sterling, the euro and the yen - reached 114.58 for the first time since May 2002, reflecting the greenback's broad strength.
"The focus is on sterling but the story on the dollar is far wider and that is the part that is not helping," said Seema Shah, chief strategist at Principal Global Investors.
"There is a lot of pressure on Japan, China that have loose policies," she added.
China's offshore yuan slid to a new low of 7.1728 per dollar, its weakest since May 2020. Onshore, the yuan also touched a 28-month trough of 7.1690.
The fresh lows came even as the central bank said it will reinstate foreign exchange risk reserves for some forwards contracts, a move that would make betting against the yuan more expensive and slow the pace of its recent depreciation.
The risk-sensitive Australian dollar dropped to $0.64845, its lowest since May 2020, and the Canadian dollar touched 1.3638 to its U.S. counterpart, its weakest since July 2020.