The sterling trade-weighted index sank to its lowest in about a year on Monday, as troubles at one of the UK's largest mortgage lenders backed the view that UK interest rates have peaked and may even need to be cut.
Last week, the British government authorised the rescue of Northern Rock after a global credit crunch impaired the lender's ability to raise cash in money markets. Northern Rock shares plunged more than 30 percent on Monday, as customers lined up for a third day to withdraw funds, despite assurances that their money was safe.
Sterling's outlook has been damaged, as a result, as markets feared Northern Rock may not be the last UK casualty of this latest global credit turmoil. Analysts said given problems in the UK financial market, the BoE may have finished tightening interest rates, which should diminish the appeal of sterling assets to global investors.
The UK currency fell to a fresh 14-month low against the euro around 69.51 pence, according to Reuters data. By 1406 GMT, the euro traded at 69.35 pence, up 0.33 percent on the day.
The pound fell around 0.34 percent against the dollar to $2.0014, dipping below the psychologically key $2 mark earlier for the first time in nearly three weeks. On a trade weighted basis, sterling was at 102.30, after falling to 102.10, the lowest since mid-September last year.
In the options market, implied vols in euro/sterling options spiked, as spot broke out of a long-held challenge to 14-month highs. One-month vols for euro/sterling were at 6.50 percent, the highest since July 2005, while one-week vols rose to 7.8 percent, highest in over three years.
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