Sterling hit a 6 1/2-month low against the euro today after inflation data cemented the view interest rates would stay near zero, with concern about the UK's fiscal position also prompting traders to dump the pound.
The data, which showed consumer prices rose just 1.1 per cent in the year to September, came a day after British prime minister Gordon Brown warned against hasty withdrawal of the monetary and fiscal stimulus that had sought to foster economic recovery.
Expectations rates will stay at record lows of 0.5 percent and that the Bank of England may extend its support programme of quantitative easing have pummelled the pound in recent months and are making traders pessimistic about its outlook.
Sterling is down nearly 3 per cent against the euro and more than 2 per cent on a trade-weighted basis this month and market positioning data shows speculators making big bets on a further fall in the pound.
The pound fell broadly, pushing the euro up 0.5 per cent on the day to 94.10 pence, its highest since late March. That helped to drive trade-weighted sterling as low as 76.8, its lowest since early April.
The pund's weakness has caused knock-on effects for Irish businesses. Speaking on RTÉ Radio today, the Irish Exporters Association said sterling's fall was "catastophic" for Irish firms.
"It is the worst period in living memory for the vast majority of irish indigenous exporters," said IEA chief executive John Whelan.
"It is one of these periods where businesses are finding it extremely difficult to stay trading and find the logic of trying to make any money out of sales into the UK almost impossible to square."
He called for new stimulus measures to help support exporters, warning that the sector was facing "copmplete decimation".
The pound fell to a five-month low of $1.5708, before paring those losses as the euro rose against the dollar. By 1237 GMT, it traded up 0.1 per cent on the day at $1.5797.
Redeker at Paribas forecast sterling would hit $1.52 by the end of the year, while adding euro/sterling parity - never seen in the single currency's history - was possible by then.
A perception UK authorities are not opposed to a weaker currency, which helps exporters, has added to sterling's woes. BoE Governor Mervyn King said last month a weak pound was helping to rebalance the UK economy.
A PricewaterhouseCoopers report also released on Tuesday highlighted the UK's indebtedness, saying Britain needed to balance its budget by the 2015/16 tax year rather than 2017/18, as planned in the government's April budget.
A dismal public balance sheet has been a factor in sterling weakness, as the government borrows roughly the equivalent of UK GDP to kickstart the economy.
The British government said yesterday it would raise billions of pounds through asset sales, which also reminded investors of the bleakness of the UK's public finances.
This grim outlook has sent investors running from UK assets. Positioning data shows traders have increased net short sterling positions to more than 62,000 contracts in the latest week, a new record, Morgan Stanley said, and many in the market do not expect a major correction soon.
With the UK expected to lag the United States, the euro zone and other countries in raising rates, some in the market say sterling is at risk of becoming a funding currency for the "carry" trade, in which investors use low-yielding currencies to buy assets in higher-yielding ones.
Reuters