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The most sustained speculative attack on the pound since Britain was ejected from the Exchange Rate Mechanism in 1992 sent sterling to its lowest ever level against the European single currency today.
Fears that the UK will suffer a long and painful recession to match any of the three big downturns since the Second World War helped push sterling to €1.1391 - and prompted concerns that further heavy selling could result in the exchange rate falling to parity over the coming months.
Selling was prompted by a prediction from the National Institute for Economic and Social Research, an economic thinktank, that the UK economy will shrink by more than 1% in the fourth quarter of 2008. The longest decline in manufacturing since the industrial slump of the early 1980s, the retrenchment in consumer spending and the deep downturn in the housing market have made investors nervous of holding sterling.
Analysts at Commerzbank warned that the UK would suffer "the worst recession in the developed world", while Howard Archer, chief European and UK economist at IHS Global Insight, warned that the economy would shrink by 2% in 2009 - a much steeper decline than the 1% drop in output forecast by Alistair Darling in last month's pre-budget report.
One business website specialising in information for private investors said that 73% of the "short" positions - selling an asset in the hope of buying it back more cheaply later - were against sterling.
Andy Yates, director of data provider DigitalLook.com, said: "Private investors have had a very tough time over the last year so it is interesting that they have been making some decent profits from the slide in the pound. Concerns over the length of the UK's recession and Government borrowing really started mounting as the summer ended and our figures show that a lot of private investors realised that there was an opportunity here to make money by going short on sterling."
Foreign exchange dealers believe that attempts by the Bank of England to kick start the economy will result in further cuts in bank rate in early 2009 and that borrowing costs will remain low for a considerable period.
The pound has sunk nearly 20% against the euro in the past year as UK interest rates fall from a peak of 5.75% to 2% and is down by more than 25% against the dollar since the summer. It was trading at $1.48 today compared to a recent peak of $2.11 earlier this year.
Mark O'Sullivan, director of trading at Currencies Direct, said he expected to see a "series of record lows" for the pound against the euro in the run-up to Christmas, with sterling possibly falling as low as €1.10.
"I don't think we'll see parity but you can never rule it out," he added. But O'Sullivan predicted that the pound would recover during 2009 as the European Central Bank cut interest rates to boost demand in the struggling eurozone.
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