The pound tumbled below $1.50 against the dollar for the first time in six years and hit a record low against the euro after the Bank of England opened the way for further cuts in UK interest rates on Wednesday.
The Bank, which last week slashed rates by 150 basis points to 3 per cent, said in its quarterly inflation report that the UK economy would contract throughout 2009 and inflation would slow and fall below its 1 per cent minimum target unless it lowered rates further.
The Bank predicted inflation would fall “well below” its 2 per cent target from the middle of 2009 and that the economy would contract at an annual rate of 1.8 per cent in the first quarter of next year.
Hans Redeker at BNP Paribas said the Bank was preparing the ground to cut rates aggressively in December, a move that would further weaken the pound.
“The inflation report was very, very dovish,” he said. “We think interest rates could be slashed by 100 basis points or even more by December and predict the pound could then go down to $1.27 in the next quarter against the dollar.”
Earlier in the session, more worrying economic data heightened the gloom surrounding the pound.
Figures showed UK unemployment rose by 36,500 in October, the biggest increase since December 1992.
Late in New York, the pound had dropped 2.8 per cent to a six-year low of $1.4957 against the dollar, lost 2.7 per cent to a fresh record low of £0.8358 against the euro and dropped 5.3 per cent to Y142.21 against the yen.
Meanwhile, a renewed focus on concerns over a sharp slowdown in global economic growth supported the low-yielding yen and dollar, sending the “haven” currencies up close to the multi-year highs they hit last month.
“The dollar and the yen remained well bid on renewed risk aversion and with concern over the global economic outlook catching most headlines,” said Marc Chandler at Brown Brothers Harriman.
He added: “Concerns over the economy are here to stay and are entirely justified considering the flows of depressed economic news out of the G10 world of late.”
The yen rose 2.6 per cent to Y95.08 against the dollar, climbed 2.8 per cent to Y118.87 against the euro and gained 5.6 per cent to Y60.60 against the Australian dollar.
Meanwhile, the dollar rose 0.2 per cent to $1.2493 against the euro and climbed 3.2 per cent to $0.6363 against the Australian dollar.
Elsewhere, concerns over global growth hit emerging market currencies. The Turkish lira dropped 3.3 per cent to TL1.6475 against the dollar, the Korean won lost 2.3 per cent to Won1,359.70 and the Brazilian real fell 4.9 per cent to R$2.3176.