Sterling slumped to a 31-year low against the dollar and a 2-1/2 year trough against the euro on Tuesday, as investors worried about the economic and financial fallout of Britain’s vote to leave the European Union.The pound, which has borne the brunt of market concerns about the economic impact of the vote, slid as much as 1.7% to hit $1.3055, its lowest since September 1985. That left it 12% below its levels before the June 23 referendum.
Sterling was also down 1.4% against the euro at 85.48 pence per euro, its lowest level since late 2013. And against the Bank of England’s trade-weighted basket of currencies, sterling fell to its weakest in more than three years.
The pound’s losses accelerated after Aviva Investors, the fund arm of insurer Aviva, suspended its UK Property Trust with immediate effect, becoming the second fund in as many days to freeze payments. On Monday, Standard Life Investments, the fund arm of insurer Standard Life, suspended its 2.9 billion pound UK real estate fund.
These moves raised concerns about whether foreign investors would pull out of UK’s commercial property sector in large numbers, putting the currency under more pressure.
“The last time we saw this kind of action was in the financial crisis,” said Mark Priest, head of index and equity market making at ETX Capital.
“Fears about the investment industry are leaching into the forex markets today, with sterling seeing heavy selling again after a few days of relative calm.”
Sterling briefly trimmed losses after Bank of England Governor Mark Carney, speaking following the publication of the Bank’s semi-annual Financial Stability Report, said the fall in the currency should help ease the balance of payments shortfall.
“One of the most striking things for us is the fact that he (Carney) spoke quite openly about the need for sterling to adjust to act as a stabilizer, and that its weakness was necessary … so that was actually a positive spin,” said ING currency strategist Viraj Patel.
The BoE also expressed concern about a fall in investor demand for British assets — which could make it harder for the country to finance its large current account deficit — as well as trouble in commercial real estate making it harder for businesses to use their property as collateral to obtain loans.
“Given that the UK’s current account deficit was running at a clip of nearly 7% of GDP over the last few months, anything that slows capital inflows undermines the currency,” said John Hardy, head of currency strategy at Saxo Bank.
Earlier, a survey of Britain’s services sector showed that uncertainty in the run-up to the referendum had slowed growth last month to a three-year low, and sent business expectations to their weakest since 2012.
But RBC Capital Markets currency strategist Adam Cole said the survey had virtually no impact on the currency, and that investors would only be able to see the real effect on business confidence in July.
Analysts said with economy likely to slip into a recession, a rate cut is likely in coming months. Investors are currently pricing in a 25 basis point rate cut in August.