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The most sustained run on the pound since Britain was ejected from the exchange rate mechanism in 1992 sent sterling yesterday to its lowest-ever level against the European single currency last night.
Fears that the UK would suffer a long and painful recession to match any of the three big downturns since the second world war helped push sterling to 1.1385 against the euro and prompted fears that further selling could result in the exchange rate falling to parity.
The selling was prompted yesterday by a prediction from the National Institute for Economic and Social Research, an economic thinktank, that the UK's economy would 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.
The pound was weak from the start of trading in London yesterday morning but slipped further after the chancellor, Alistair Darling, said there would be no official action to halt the fall in the currency. "Exchange rates right across the world have been pretty volatile, very volatile in fact. The depreciation clearly does help our exporters. But currencies have been pretty volatile over the last few months.
"Our policy, the Bank of England's policy, is to target inflation not to target the currency."
By the close of business in London, sterling's trade-weighted index against a basket of global currencies had fallen to 79.7% of its value in 2005, the lowest on a daily basis according to Bank of England records going back to 1990. Despite sterling's losses against the euro, it rose 0.6% to 1.4829 against a broadly weaker dollar.
Government figures this week showed that the fall in the value of the pound has failed to boost manufacturing output or dent the UK's trade deficit in goods, which is running at well over £7bn a month. The Bank of England has cut the bank rate from nearly 5% to 2% since early October, but the pound has been undermined by the widespread belief in financial markets that borrowing costs may need to go to 1% or even lower in order to kick-start the economy. Borrowing costs are expected to remain low for an extended period.
"There's really not much good to say about the pound, although it has already fallen a long way," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ. Given the prospect of lower interest rates and a rising budget deficit, "the risks are still clearly to the downside", he added.
Analysts at Commerzbank said the UK would suffer "the worst recession in the developed world", while Howard Archer, chief European and UK economist at IHS Global Insight, said the economy would shrink by 2% next year, a much steeper decline than the 1% drop forecast by Darling in last month's pre-budget report.
One business website specialising in information for private investors said yesterday 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 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."
The pound has sunk nearly 20% against the euro in the past year - as UK interest rates fell from a peak of 5.75% to 2% - and is down more than 25% against the dollar since the summer.
Mark O'Sullivan, director of trading at Currencies Direct, said he expected a "series of record lows" for the pound against the euro in the run-up to Christmas.
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