Pound slumps closer to parity with the euro and dollar

Sterling slumped to its lowest level against the dollar for nearly a quarter of a century today on persistent fears about the health of Britain's banks and worries that the cost of bailing them out could be a millstone round the economy's neck for many years to come.

The pound fell as low as $1.362 during a hectic trading day, pressured also by bad public finance figures and a speech by Bank of England governor Mervyn King on Tuesday night that indicated that further action would be needed to prevent the economy melting down.

Sterling showed some recovery in later trading in New York on reports that the currency's weakness will be on the agenda at the next meeting of the G7, but it was still changing hands at below the $1.40 level.

The pound's new level marks a 35pc tumble since the peak of $2.11 it hit in the summer and is the lowest since the dollar was dropping in late 1985 after the legendary Plaza accords that year when the world's leading economic powers intervened to push the greenback down.

At the beginning of 1985 the pound had almost touched parity with the dollar. That was again being touted as a possibility today.

The possibility of unconventional measures - known as "quantitative easing" - to inject money into the economy also weighed heavily on the currency, after King indicated that such measures could start within weeks. "I fear for sterling," said Standard Bank G10 currency strategist Steve Barrow. "It is the whipping boy of all the major currencies, not just because of the banking-sector problems but also the prospect of quantitative easing.

"Quantitative easing is very negative for a currency, not just because it happens when interest rates are very low but because the point of it is to devalue the currency."

The pound also fell against the euro, to €1.06, although remained above the record lows of about €1.02 hit last week.

While the pound’s weak standing is good news for British exporters, it is crippling for holidaymakers and those planning festive shopping trips in Europe.

The recent run on the pound has brought it ever closer to official parity with the euro. In reality, however, most tourists are already facing less than one to one exchanges once charges and commission are deducted.

Currency traders have been panicked by the MPC’s indications that further interest rate cuts could be justified in an effort to combat the scale of the recession.

“Financial markets had priced in a cut of 100 basis points and there was a risk that going further could cause an excessive fall in the exchange rate,� the minutes said. UK interest rates stand at 2 per cent, equalling the all-time low, and further cuts now seem inevitable.