Sterling fell to a two-year low against the dollar and a one-month low against the euro on Friday as the pound's interest rate advantage looked set to wane.
Interest rates are expected to rise this year in the eurozone and in the United States, whereas speculation that the cost of borrowing will fall in the UK has intensified this week after the Bank of England's quarterly inflation report was less upbeat on economic growth and less worried about inflation.
Sterling's weakness against the euro was triggered by European Central Bank President Jean-Claude Trichet, who signalled that eurozone interest rates would rise from 2.0 percent in December.
"The big reaction has been to Trichet and the euro has been dragged higher on that," said Tom Vosa, head of market economics at National Australia Bank.
By 1500 GMT, sterling was up 0.1 percent against the euro at 68.44 pence after hitting a one-month high of 68.52 pence shortly after Trichet's remarks at a banking congress in Frankfurt.
Against the dollar, sterling hit a two-year low of $1.7100 before trimming losses to $1.7199 as the euro rallied.
The Bank of England has kept rates on hold at 4.5 percent for three consecutive months after cutting the cost of borrowing for the first time in two years in August.
Next week investors will scrutinise minutes of the Bank of England's policy meeting earlier this month for clues on the future path of interest rates.