Sterling hit a 10-day low against the dollar on Monday after UK lender Bradford & Bingley was nationalised, snapping attention away from US financial sector worries. The deepening banking sector and money market crisis against a backdrop of slowing growth also dimmed the pound's yield appeal as speculation grew that the Bank of England would need to cut rates soon.
"The apparent contagion of the financial crisis into Europe has become a bigger factor than the US bailout package," said Adam Cole, global head of FX strategy at RBC Capital Markets in London. The pound later shed some of its losses after global central banks threw more resources into boosting US dollar liquidity.
The US Federal Reserve sharply increased the amount and extended the duration of its currency swap arrangements with nine central banks including those of Canada, England, Japan, Denmark and the European Central Bank. At 1427 GMT, sterling was down 1.8 percent at $1.8105 after hitting a 10-day low of $1.7962, according to Reuters data.
Sterling also hit a two-week low on a trade-weighted basis at 90.10. European shares fell heavily as the financial storm hit home and as investors pondered the impact of a long-awaited US government plan worth up to $700 billion to shore up its banking sector. The pan-European FTSEurofirst 300 Index fell 5 percent.
In a widely anticipated move, the UK government said mortgage lender Bradford & Bingley's branch network will be sold to Spanish bank Santander and the remainder of the group would be nationalised. But the news raised concerns of further fallout from a banking crisis that was spreading well beyond US borders.
Although the pound also lost ground against the euro, the banking sector crisis hit the common currency, too. Belgian-Dutch financial group Fortis was rescued in a state buyout after European Central Bank President Jean-Claude Trichet held emergency talks with Dutch, Belgian and Luxembourg officials.
Separately, the German government and a consortium of banks decided to provide 35 billion euros ($51.21 billion) in credit guarantees to Hypo Real Estate. The euro was up 0.7 percent at 79.76 pence.
US lawmakers were gearing to vote on the plan that would provide the government with up to $700 billion to buy toxic assets, while Wachovia Corp became the latest casualty of the banking crisis as it was taken over by Citigroup.
Back in the UK, data on Monday confirmed a decline in the already floundering UK housing sector. British mortgage approvals fell to a series low of 32,000 in August while net mortgage lending slowed to a standstill. A separate survey by property consultants Hometrack showed British house prices fell for a 12th month running in September to stand 6.2 percent lower than they were a year ago.
"The BoE may finally have to acknowledge sharply tighter credit conditions and that weak growth will show substantially below-trend demand that will open the possibility for rate cuts," ING senior currency strategist Chris Turner said in London.