Sterling plunged to a seven-year low against the dollar today on banking sector woes, while the euro dropped to a six-week low against the US currency, weighed by worries about the state of the euro zone economy.
The pound tumbled after UK bank RBS announced the biggest loss in British corporate history yesterday and the UK announced a second series of measures to bail out the banking sector.
Fears about the outlook for the euro zone economy also weighed on the euro, pushing it to a six-week low against the dollar below $1.30 after the European Commission issued a grim 2009 forecast and Standard and Poor's cut Spain's debt ratings.
European shares edged lower, helping the yen gain sharply as investors remained wary of taking on risk.
Focus today will centre on Barack Obama's inauguration as US president, amid hopes that he will implement swift action that will help the US economy, which has helped to bolster dollar sentiment.
Along with massive falls in the pound and the euro, this has helped pushed the dollar to a six-week high against a basket of currencies.
“The Obama euphoria is dollar positive, and the biggest casualty of this is sterling because by contrast sterling sentiment is really bad,” Commerzbank currency strategist Antje Praefcke said.
At 8.30am, sterling was 2.7 per cent down against the dollar at $1.4076, just above an earlier trough of $1.4057, its weakest level since early 2002, while the euro fell 1.2 per cent to $1.2950, having hit a six-week low of $1.2923.
The trade-weighted dollar index was up 0.9 per cent, hitting a six-week high of 85.993. The yen also rose, with the dollar down 0.1 per cent at 90.57 yen and the euro down 1.4 per cent at 117.20 yen.
The European Commission on Monday forecast the euro zone will contract by 1.9 per cent in 2009, while S&P's downgrade on Spain sparked fears that cuts to other euro zone countries' debt ratings will follow after a downgrade for Greece last week.
“The ailing banking sector in the UK coupled with weak economic conditions in Europe has accelerated downward pressure on currencies in Europe,” said Saburo Matsumoto, senior manager at Sumitomo Trust & Banking.
Reuters