The pound fell on Monday on speculation that the Bank of England could expand its asset purchase scheme after monthly policy meeting minutes showed that governor Mervyn King had pressed unsuccessfully for greater stimulus.
Mr King and two other members of the nine-person monetary policy committee had voted to bolster the quantitative easing programme by an extra £25bn to £200bn but were outvoted.
The news shook sterling, shaving off much of the gains it had made on Tuesday after UK inflation data surprised the markets by holding steady when most economists had predicted consumer prices would fall.
“We’ve had some unexpectedly strong inflation figures but if, as we expect, that turns out to have been a blip and the economic recovery is weaker than the MPC expects, there is a good chance that it will extend the quantitative easing programme again in November,” said Vicky Redwood, of Capital Economics.
By midday in New York, the pound was down 0.4 per cent against the dollar to $1.6490 and lost 1 per cent versus the euro to £0.8620.
Sterling also fell 1.4 per cent against the yen to Y154.61 and 1.3 per cent on the Swiss franc to SFr1.7577.
The dollar and yen advanced after falls for Chinese equities overnight saw investors adopt more defensive positions, switching out of risky assets and putting pressure on equities.
“Confidence remains fragile,” said analysts at Barclays Capital. “Asian equities fell again overnight adding to the weakness since late last week. With little major economic data in the coming trading sessions, FX market sentiment is likely to continue being affected by movements in equity markets.”
The dollar rose 0.6 per cent against the euro to $1.4218 and 0.2 per cent on the Australian dollar to $0.8247.
The yen, meanwhile, added 1 per cent against the dollar to Y93.79 and 0.3 per cent again the euro to Y133.41.
Hans Redeker, of BNP Paribas, said there were “warning signals” flashing for the euro. “Optimism as reflected by the sharp rise of [the] ZEW release seems to be misplaced,” Mr Redeker said, referring to Tuesday’s strong German business confidence survey.
Mr Redeker argued that “there should be a risk premium built into euro denominated assets”, citing a gloomy outlook from German economic state secretary about the country’s economy in 2010.
Elsewhere, the Icelandic krona firmed against the euro, rising 0.6 per cent to IKr180.91. The Icelandic parliament is close to approving the repayment of nearly €4bn lost by British and Dutch savers in the Icelandic banking crisis, a step seen as crucial to securing further international support for its economy.
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