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Speculators last night stood to make hefty gains from bets they had placed against the pound after the embattled currency hit another low and skidded ever closer to parity against the euro.
Sterling hit €1.1086 - seen by currency experts as the level used by many speculative traders as a base from which to take profits. This level - which gives visitors to the UK from the eurozone 90.22p for every euro - is the lowest equivalent price for sterling against the German mark before 1999, when the single currency was introduced.
The pound recovered later and strengthened against the dollar, which was knocked amid speculation that the US Federal Reserve was poised to cut interest rates to try to kickstart the faltering American economy. Traders also noted that anxiety about the alleged $50bn (£33bn) fraud by Wall Street financier Bernard Madoff had unsettled nerves and affected the appetite for the US currency.
Nicholas Fullerton, managing director of currency dealers FC Exchange, predicted that sterling's fall had opened up the possibility of making a profit.
For example, anyone who bought £100,000 of euros last week when the exchange rate was €1.14 would have made a profit of £2,800 if they had sold them yesterday at the new level for the pound.
Such orders are likely to have been pre-arranged with brokers and automatically activated when the level was reached.
Another trader agreed that sterling had hit a significant level against the euro that would have been used by hedge funds and professional investors as a moment to take profits.
Yesterday was the first time the euro broke through the 90p level. While this caused relief for exporters it potentially makes holidays in continental Europe more expensive for Britons.
Ever since George Soros's extraordinary gamble against the pound forced sterling out of the exchange rate mechanism in 1992, the markets have been alert to major positions being amassed in the currency. Traders did not see such position-taking by any one fund but noted that currency funds had already been reporting their highest levels for five years in October.
Other currency experts noted that the dramatic movement in sterling in the past month would also have helped hedge funds, whose strategies are based on riding trends. Sterling has hit trading lows for six days in a row and, while it has lost a quarter of its value so far this year, its fall began in earnest this summer.
Traders believe their returns of an average 2.5% in October are likely to have continued and even increased since as clear trends took hold.
"Currency funds have had a tremendous year," one trader said. "The markets have moved fast and in one direction which is what they like."
Others noted, however, that volumes tended to be light in December and were particularly so this year as a result of the global banking crisis.
"People tend to sit on the sidelines at times like these," said Ross Burland, head of Corporate Dealing at RationalFX.
Phyllis Papadavid, senior foreign exchange strategist at French bank Société Générale, also questioned how many new positions would be put on in the current market conditions. "Investors tend not to put on new positions and keep their risk tight and in that kind of environment stay away from currencies like sterling which are pro-cyclical so tend to do worse in downturns."
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