Sterling hit a 14-month low against the euro today on the back of news that a major British mortgage lender had become a casualty of the credit squeeze.
Earlier this morning, sterling was down 0.14 per cent at $2.0192, around one-week lows. The euro gained a quarter of a per cent to 68.79 pence, hitting levels last seen in July 2006.
The euro has been supported across the board by expectations that the European Central Bank - unlike its counterparts in other countries - may continue raising interest rates once calm returns to financial markets.
It was on track for its biggest weekly gain versus the pound in percentage terms in six months.
The Bank of England has provided an unspecified amount of financial support to Northern Rock, which was the country's biggest mortgage lender in the first half of 2007.
The company has fallen victim to the credit squeeze which was sparked by a crisis in the U.S. subprime mortgage market.
Its predicament raises concerns about the impact of the credit crunch on the UK economy as a whole, and further cements expectations that interest rates have likely peaked.