Tumbling sterling brings a warning of $1.20 rate

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The pound dived to a 23-year low of $1.3503 after GDP figures showed the British economy shrank by a worse-than-expected 1.5% in the last quarter.

Sterling also hit a low against the Japanese yen of 118.90 yen, a level not seen since 1971 when fixed exchange rates ended. The beleaguered British currency was trading down 0.28 of a cent against the euro at €1.0632.

Ian Stannard, foreign exchange strategist at BNP Paribas, said: "Sterling is going to remain under pressure against the dollar. We think there is scope to go down to the $1.20 area. The yen should also be extremely strong at least until the end of March."

Japanese investors will be repatriating yen funds to their home country in time for their year-end on 31 March. But Stannard added that the pound was not in danger of reaching parity against the euro: "There is still a lot of negative news to come out of Europe."

Currency traders now expect the Bank of England to cut interest rates by half a point from its current 1.5% level on 5 February, further weakening the pound.