Sterling caught the backlash yesterday from the euro's record breaking fall on the foreign exchanges when the pound was dragged down to a 14-year low against the dollar.
It dropped below $1.40 for the first time since it was ejected from the ERM in 1993, at one point falling as far as $1.3953, its lowest level since early 1986. It recovered slightly to close in London at $1.4058.
Analysts said the pound had been the victim of renewed euro weakness as the single currency plumbed fresh lows against the dollar for the second day. "The market had been looking at sterling as a serious safe haven within the European Union as opposed to the euro zone," said Steven Saywell, currency analyst at Fuji Bank. "But with UK growth and interest rates close to peaking, the attractiveness of the UK against the euro zone has been diminished at a time of renewed confidence in the US economy."
Nick Parsons, currency strategist at Commerzbank, said the pound had been one of the worst performing currencies in the world in the past month, even falling against emerging market currencies like the Hungarian forint, Czech crown and Romanian leu. Some analysts said the pound was falling into step with the euro as traders detect more enthusiasm from the government for an early referendum on euro membership.
"The diversification argument of sterling against the euro is starting to go away with the government assuming more commitment to membership or at least driving towards a referendum at some point in the next few years," said Jake Moore, currency strategist at Barclays Capital in London.
The euro reached a record low of 85.53 cents against the dollar, before clambering back above 86 cents ahead of a speech from the governor of the European Central Bank, Wim Duisenberg.
Mr Duisenberg insisted that the euro's slump defied economic fundamentals.
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