The inflation report from the Bank of England triggered the fall in the pound
The pound has sunk to 22-month lows against the dollar after the Bank of England's inflation report warned the UK could be heading for a recession.
Sterling sank more than 3 cents to $1.8769 in the wake of the report.
While the report said growth would be "broadly flat", Governor Mervyn King said there was a possibility that output may fall.
Recent official figures have already shown the UK is struggling with high inflation and faltering growth.
The pound also fell against the euro to as low as 1.259 euros following the news, before settling around the 1.26 euro mark.
Meanwhile, concerns about European growth have also helped the dollar bounce back from record lows.
The euro recovered slightly against the dollar after Tuesday's falls to stand at $1.4916, well off lows of $1.6038 hit last month.
The US economy is still suffering from the credit crisis but analysts say the deteriorating outlook elsewhere in the world has buoyed the currency's standing.
The falling price of commodities, which are priced in dollars, has also helped the US currency. Investors had bought oil and gold to protect against dollar weakness but they are now unwinding those positions.
The euro has been further undermined by military conflict in Georgia that could disrupt European markets.
However, analysts cautioned that the dollar's rally might not be sustainable.
"The scope for a much faster recovery in the dollar is still limited by relatively poor economic fundamentals in the US," said Julian Jessop, chief international economist at Capital Economics.