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The pound dropped to a new record low against the euro today after a fresh bout of turbulence on the foreign exchanges prompted by the collapse of a bail-out plan for US car makers, a fresh setback in the global trade talks and fears of deepening global recession.
At the end of a week of relentless selling, fears that the UK would be one of the countries worst affected by the downturn pushed sterling to €1.1131 against the single currency by the close of business in London.
The Economist Intelligence Unit said Britain would suffer the 10th largest fall in output of the 29 countries it is predicting will have negative growth next year. Iceland is expected to be the worst hit nation, with output falling by 10%, but the UK economy is forecast to shrink by 2.1%.
Tonight, dealers said the euro was on course for its biggest one-month rise against sterling since it was founded in 1999. The pound has fallen sharply following the Bank of England's emergency rate cuts from 5% to 2% this autumn, but the financial markets believe there will be further reductions in the cost of borrowing in the new year.
Sterling was down against the dollar, despite the fallout from the Senate decision to block the $14bn (£9bn) rescue package for the US car industry. It fell 0.7% to $1.4914 while its trade weighted index against a basket of global currencies was down to 78.9% of its 2005 value - the lowest level since daily records were kept by the Bank of England in 1990.
"It remains the easiest play in town to sell the pound", said Lee Hardman, currency economist at Tokyo-Mitsubishi UFJ in London.
Concerns that global recession will encourage protectionism were heightened tonight when the director-general of the World Trade Organisation, Pascal Lamy, abandoned plans for a summit next week to agree the framework of a new trade liberalisation deal.
Pressed by Gordon Brown, last month's G20 summit in Washington had insisted that the seven-year talks be wrapped up by the end of the year. Lamy said last night that would be impossible.
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