The dollar rose to a fresh 7-1/2 year high against sterling on Wednesday as UK bank woes continued to weigh on the pound, while the euro rose against most major currencies.
The pound, which has fallen around 7 percent against the U.S. unit since the start of the week, extended losses on concerns that UK banks will need to shore up their financial health as the economy deteriorates, and that a government package announced earlier in the week may not help.
Shares in Britain's Barclays Plc tumbled a third in value to a 24-year low in London on Wednesday on the threat it needs to raise funds or could be nationalized.
Shares in rival British bank Lloyds Banking Group also fell sharply as it faces an even greater risk of nationalization.
"The UK financial system is in tatters," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida. "We have not seen a bottom for sterling."
In early New York trade, sterling was down 1.1 percent at $1.3742 after falling to its lowest since June 2001.
Simpson of Action Economics sees sterling trading as low as $1.25 in the near term.
The British currency was at 123.62 yen, down 1 percent though off the low of 122.94 yen on Wednesday, according to Reuters data.
Data on Wednesday showed a sharp deterioration in Britain's public finances and a rise in joblessness, but such data and the release of minutes from the latest Bank of England policy meeting were overshadowed by banking sector woes.
BoE minutes showed the BoE's Monetary Policy Committee voted 8-1 to cut interest rates by 50 basis points to a record low of 1.5 percent this month, with arch-dove David Blanchflower calling for a 100 bps reduction.
Policy-makers also said the fall in the pound would help support growth and the rebalancing of the economy. But they noted that if there were indications -- perhaps from lower gilt prices -- that a weakening exchange rate reflected a loss of credibility in UK policy, then that would be bad news for the medium-term outlook.
The euro was firmer across the board and rose more than 1 percent to 94.20 pence at its peak, according to Reuters data in New York, its strongest since the start of the month and closer to a record high of 98.05 pence hit last month.
Speaking before parliament, European Central Bank President Jean-Claude Trichet played down the threat of deflation, while rebuffing talk that some euro-zone member states would leave the union given the financial crisis.
He added that all global currencies were under pressure.
The dollar rose 0.2 percent against the yen at 89.97 yen.
