Sterling slid to its weakest level in more than three decades against a broadly stronger dollar on Tuesday, hit by fears over the impact of Britain's looming departure from the European Union. The greenback climbed 0.7 percent to a 13-day high against a basket of major currencies, helped by an increase in risk sentiment and an upbeat survey of the US manufacturing sector that drove investors to up their bets on a rise in US interest rates by the end of the year.
The pound had already shed more than 1 percent the previous day on the back of British Prime Minister Theresa May's announcement a day earlier that the formal process to take Britain out of the EU will start by the end of March. It extended those falls on Tuesday, slipping more than half a percent to $1.2737, its weakest since June 1985. That left it down 15 percent since Britain's June 23 referendum on EU membership.
Many in the market worry the British government's stance points to a "hard Brexit", in which Britain splits entirely from the single market in favour of retaining control over immigration, which could drive an exodus of banks from London. "Speculation about Brexit has picked up since the weekend, which has put continuous downward pressure on sterling, but the main driver today has been US dollar strength," said Commerzbank currency strategist Esther Reichelt, from Frankfurt.
"If you had to pick one currency right now, it's going to be the US dollar. Good data increases the chances of interest rate rises and when the dollar appreciates, people are jumping on that train." While the turmoil in the days and weeks following Britain's EU referendum spurred demand for safe-havens like the yen, analysts pointed out that the latest slide in the pound had yet to trigger similar reaction.
The dollar climbed 0.8 percent to hit a 13-day high of 102.495 yen on Tuesday, with risk appetite helped by stabilising oil prices and an easing of worries over the stability of Deutsche Bank. "Right now the reaction to Prime Minister May setting a departure deadline is mostly limited to the pound. A greater negative impact on the British economy will have to be witnessed first for Brexit woes to cause broader risk aversion," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo. The Australian dollar showed little reaction to the Reserve Bank of Australia's widely-expected decision to stand pat on monetary policy, edging down 0.1 percent to $0.7664.