The pound fell against the yen and dollar in step with other high-yielding currencies on Thursday after renewed credit concerns dampened risk appetite and prompted broad unwinding of carry trades. The latest jitters started when BNP Paribas suspended more than $2 billion worth of funds because of problems in the US subprime mortgage market.
The move sent shivers through financial markets already nervous about the impact on the broader economy from US mortgage troubles. As a result, investors bought back the low-yielding yen and sold off high-yielding currencies including sterling to reduce their exposure to risky assets.
"The only news that drove the market to yet another volatile session was the BNP announcement this morning," said Audrey Childe-Freeman, European economist at CIBC World Markets.
"The market is still highly nervous to the subprime story and that leaves scope for a volatile environment for the FX market, that means we may see continued unwinding in carry trade in the near-term."
By 1425 GMT the pound was down 1.5 percent on the day at 239.85 yen, while it fell 0.5 percent to $2.0269. Against the broadly weaker euro it was up around 0.2 percent at 67.59 pence per euro. Sterling showed little reaction to data showing UK trade deficit narrowed unexpectedly in June to its smallest since October 2005.