The pound tumbled to its lowest since 1985 against the dollar on Wednesday, battered by the woes of the UK banking sector and the prospect of more interest rate cuts. Sterling's slide has accelerated after a government bank rescue plan unveiled earlier this week failed to reassure investors or to stem losses in banking stocks, and instead sparked market concern about the UK's mounting debt burden.
Bank of England chief Mervyn King's suggestion the BoE could use unconventional measures to boost the money supply and stimulate the economy once it runs out of interest rate ammunition also helped to drive sterling down. "The downtrend in sterling that we've been seeing for a while persists," State Street foreign exchange strategist Lee Ferridge said.
"For me the fiscal deterioration is the biggest worry, but the prospect of quantitative easing is also sterling negative." The pound fell as low as $1.3622, its lowest since September 1985. Those lows were hit just a day after it suffered its biggest one-day percentage fall since it quit the ERM in 1992.
Its current levels are a far cry from July 2008, when sterling was trading above $2, and its weakness was not confined to its exchange rate against the dollar.
The euro rose more than one percent against the pound, to scale two-week high of 94.18 pence at one point during the European session and the pound tumbled to a new record lows under 119.50 yen.
The losses against the currencies of the UK's major trading partners left sterling at its lowest so far this year against a basket of currencies, at 74.1. Sterling has been battered as UK banks have seen their share tumble one after the other this week. Barclays was Wednesday's victim, its share price skidding at one point to its lowest since 1985.
Concerns grew about the sector and the cost to the public purse of shoring it up after the head of the UK parliament's Treasury Committee John McFall urged a nationalisation of Royal Bank of Scotland and Lloyds Banking Group.
Investors' worries about the health of the UK public finances appeared justified after data on Wednesday showed a startling rise in UK public sector borrowing, alongside another big jump in unemployment claims last month.
Such weakness in the labour market and in the wider economy means traders and investors are looking for more rate cuts, even though UK interest rates have fallen by 3.5 percentage points since October, taking them to a historic low of 1.50 percent.
Minutes for the last BoE meeting showed one policymaker, David Blanchflower, voted for rates to be cut by a full percentage point - twice as much as the majority - to avoid a deep and protracted recession. "I fear for sterling. It is the whipping boy of all the major currencies," Standard Bank strategist Steve Barrow said.
"Quantitative easing is very negative for a currency, not just because it happens when interest rates are very low but because the point of it is to devalue the currency," he said. The problem for the pound is that there have been no indications so far that the BoE is too concerned by its slide, which it believes should help support the economy.
For example, UK fashion group Burberry says it has gained from tourist flows into London due to the weak pound and UK firm Abcam, which sells antibodies, cites the ongoing fall in sterling as a "major factor" in pushing its profits higher.
However, the BoE minutes said it would be a cause for concern if exchange rate weakness reflected a loss of confidence in UK policy. There were some indications that sterling might have been oversold as a Merrill Lynch survey revealed fund managers considered the UK currency to be the most undervalued, although the poll was taken before its recent tumble.