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UPDATE 2-Sterling stuck near 2-1/2-year lows as Truss set to become UK's PM

·2 min read

(Adds context, updates prices, adds graphic)

By Samuel Indyk

LONDON, Sept 5 (Reuters) - The pound languished near 2-1/2-year lows against the dollar on Monday, as Liz Truss was set to become Britain's next prime minister after winning a leadership race for the governing Conservative Party against a deteriorating economic backdrop.

The new PM is set to inherit an economy staring at recession, with sterling one of the worst performing major currencies in 2022. The pound has slid 15% against the dollar as inflation surged to double digits and growth grinds to a halt.

British government bonds also suffered their biggest monthly price losses in decades in August, due to inflation fears but also on Truss's planned tax cuts and proposals to stimulate the economy with fiscal spending.

The risk of a UK balance of payment crisis "should not be underestimated" under a Truss government, Deutsche Bank warned, citing the potential for large unfunded fiscal expansion and changes to the Bank of England mandate to damage investor confidence.

By 1435 GMT, the pound was down 0.14% at $1.1503, having fallen to as low as $1.1444 earlier in the day as news that Russia would keep one of its main gas supply routes to Europe shut added to UK recession fears.

Against the euro, sterling was up 0.17% at 86.30 pence.

Truss, who won the leadership contest with 57.4% of the vote, said she would deliver a "bold plan" to cut taxes and grow the economy. Former Chancellor Rishi Sunak received 42.6% of the vote.

Markets awaited details on how Truss plans to fund her fiscal policy.

"The pound would have lifted higher had Rishi Sunak won as he was more committed to getting a hold on inflation, while Truss is prioritising tax cuts," said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown in London.

"That's why you've seen such nervousness, particularly in the currency markets, because of worries about what damage this could do to the long-term stability of the UK," Streeter added.

A move in sterling below $1.1413 would take it to its lowest level since 1985, according to Refinitiv data.

Its latest leg lower came after Russia said on Friday it would not restart gas supplies to Europe through the Nord Stream 1 pipeline.

"Truss said that by the end of the week she will present details of her energy plan and maybe lift the veil of her fiscal plans and that's what the market wants to hear," said Kenneth Broux, senior currency strategist at Societe Generale.

(Reporting by Samuel Indyk in London Editing by Dhara Ranasinghe, Matthew Lewis and Ed Osmond)