Sterling was on course for its biggest one-day decline against the dollar since March 2023, as the US currency soared following the election of Donald Trump as president.
The election result sent the dollar surging against a basket of currencies, including the pound, as Trump's expected expansionary fiscal policy and the imposition of tariffs on U.S. imports are expected to lead to a rise in the 'inflation.
The Republican Party also took control of the Senate and advanced in the House of Representatives. A “Red Sweep” where the party controls the presidency, Senate and House would put Republicans in a stronger position to dictate policy.
“The inflationary nature of Trump's policies supports the dollar, and short-term market reactions reflect that,” said Joe Tuckey, head of currency analysis at Argentex Group.
Sterling was down 1.2% against the dollar at $1.28955, its biggest one-day decline since March 2023.
The dollar index, which measures the currency against six others including the pound, was up 1.6% at 104.97.
The last two weeks have been very busy for pound traders, starting with last week's budget, the first under the new Labor government.
That budget included big tax rises, spending increases and higher borrowing levels, which sent Britain's bond markets reeling and sent yields soaring to multi-month highs.
The UK 10-year bond yield fell 2 basis points on Wednesday, after reaching its highest level since November 2023.
Attention now shifts to the Bank of England's monetary policy announcement on Thursday, where the market expects a 25 basis point cut in the interest rate.
Kirstine Kundby-Nielsen, foreign exchange analyst at Danske Bank, expects the pound to outperform the euro as the BoE is expected to follow a slower easing path than the European Central Bank.
“You see more growth in the UK and you see the Bank of England being much more gradual in the way they approach monetary easing,” said Kirstine Kundby-Nielsen of Danske Bank.
“I still think the pound will strengthen against the euro.
The pound rose around 0.5% to 83.38 pence per euro.
