Page last updated at 17:29 GMT, Tuesday, 20 January 2009

Bank woes push pound below $1.40

Pound coin rests on dollar notes
The weak pound makes it more expensive to travel abroad

Concerns about the UK banking sector have further undermined the pound, with the currency sliding below $1.40.

Sterling also hit a record low against the Japanese currency at 127.47 yen. Against the dollar, it reached $1.386, its lowest level since 2001.

Some analysts suggested a fresh bail-out for the banking industry had prompted a sell-off of the pound.

And record losses at Royal Bank of Scotland had shaken the UK's financial infrastructure, another said.

RBS shares fell 11%, having plunged 67% on Monday after the bank had predicted further losses.

Other banks also suffered with Lloyds TSB closing down by 31% on Tuesday, with Barclays shares 17% lower.

The prediction by RBS that it would see Britain's biggest ever corporate loss was "shattering news" said David Buik of BGC Partners. "[It] shook the rafters of the City of London as well as the UK's entire financial infrastructure", he said.

UK risk

The government's second attempt to bolster the UK's banking sector included an insurance scheme to cover bad debts held by banks and a 50bn fund to allow the Bank of England to lend money directly to businesses.

Investors fear that the cost of the banking bail-out could weaken the UK's national finances and hurt sterling - which has fallen sharply since last summer, when a pound was worth $2.

Pound Sterling v United States Dollar intraday chart
*All Times GMT

Unusually, markets now rate the debt from some blue-chip companies as better risks than UK government debt.

"Investors are concerned about the cost of the government [bail-out] measures and the implications they might have, with escalating borrowing and the possible doubling of Britain's debt ratio," said Neil Mackinnon, chief economist at ECU Group.

"There is mounting market talk that Britain's credit rating will be downgraded," he added.

There's a link between the perceived weakness of the banks and a fall in sterling
Robert Peston, BBC business editor

"There is no doubt that long-term investors see a risk in our UK government debt, more risk than the likes of BP and Unilever," Max King, a market strategist at Investec told BBC News.

However, analysts at Barclays said that the actions the government were taking could help support the pound in the longer term.

"Over the medium term, the more proactive stance by UK authorities, especially relative to the euro area, should be positive for the UK economy and sterling," Barclays said.

The pound weakened against the euro, with one euro worth 92.3 pence - undoing much of its recent gains against the currency.

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