The pound has hit a new 37-year low against the dollar after Vladimir Putin announced he was calling on reservists to fight in Ukraine and accused the West of “nuclear blackmail”.
The move, which marks an escalation of the conflict, led to a brief flight to safe-haven assets like the dollar.
The pound briefly touched $1,13040 – its lowest level since 1985 – before gaining ground again.
Separately, the figures showed that borrowing costs in the UK hit a new record in August.
In a televised address, the Russian president said he had signed a decree on partial mobilization – the first since World War II – because he wants to send up to 300,000 additional soldiers into battle.
He also accused the West of wanting to destroy Russia, adding that the country had “many weapons to answer”.
The comments confused investors buying the dollar, gold and bonds, all of which are considered less risky assets.
Sterling traders – which have been at low levels for weeks – also looked forward to a much-anticipated rate hike by the Federal Reserve on Wednesday.
The US central bank has already raised interest rates four times this year to fight inflation. The Bank of England (BoE) is also expected to raise interest rates Thursday as the UK faces its own cost of living.
Sterling investors are also nervous about the policy implications of a planned government mini-budget on Friday, which will reportedly include £30bn in tax cuts.
It comes at a time when the UK is borrowing billions of pounds to cover energy bills for households and businesses, adding to the UK’s already large mountain of debt.
Official figures on Wednesday showed the government is also facing rising interest payments on that debt as a result of rising inflation.
Interest owed over the month was £8.2bn – £1.5bn more than last year and the highest August figure since registration began in 1997, the Office for National Statistics (ONS) said.
Meanwhile, total government borrowing – the difference between spending and tax revenues – was £11.8 billion. That’s twice the level forecast for August by the Office for Budget Responsibility, the government’s independent fiscal watchdog.
Martyn Beck, chief economic adviser to the EY Item Club and former Treasury economist, said the UK economy has been “quite weak” in recent months.
That meant that less was generated in taxes, while the government had to spend more on interest payments, he added.
But he said he was “not particularly” concerned about high debt levels, as UK borrowing costs were “still quite low” compared to long-term historical records.
Chancellor Kwasi Kwarteng defended the government’s decision to spend billions on helping families and businesses with their bills.
He added that the government’s priority was to “grow the economy and improve living standards for all – where strong economic growth and sustainable public finances go hand in hand”.
“As chancellor, I have pledged to deleverage over the medium term,” he added. “But despite a major economic shock, it is perfectly right that the government is now taking action to help families and businesses, just as we did during the pandemic.”