The pound (GBPUSD=X) extended losses on Thursday as traders asses the Bank of England's 0.5 percentage point interest rate lift following the Federal Reserve's supersized rate hike.
Sterling fell as much as 0.3% to $1.123 against the dollar in early trade – the lowest level in 37 years, trading at $1.125 following the rate increase.
The BoE delivered a more dovish 50 basis points hike, taking the key rate from 1.75% to 2.25% — the biggest since 2008.
Thursday's slump means that the pound is down nearly 17% so far this year, surpassing the 16% wipeout it suffered in 2016 following the Brexit referendum, and on track to its worst year since the financial crash in 2008, when it lost 26%.
It comes as the greenback surged to a fresh 20-year high against its peers after the Federal Open Market Committee lifted its key rate by 0.75 percentage points for the third time in a row and projected further increases in borrowing costs in an effort to tame inflation.
Analyst say the smaller rate hike could pile more pressure on the pound as investors often chase higher rates.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: "The pound has been suffering as the dollar has gained more strength amid expectations the Federal Reserve will keep staying ahead of the pack.
"If the Bank of England relaxes its grip in rate rises, sterling could be dented considerably further, which could see inflation slipping ahead again due to the impact of pricier imports.
"Already the pound has fallen on the news, back to below $1.13 and the Bank will won’t want this pattern to accelerate further."
Wednesday's August public finance numbers, showing the UK borrowed almost twice as much as expected, have also added to the pressure.
Russ Mould, investment director at AJ Bell, said: "Governor Andrew Bailey and his colleagues made a total mess of it by arguing inflation would prove transitory and insisting policy was 'data dependent'.
"That leaves them catching up and investors in shares and bonds and traders in currencies could be forgiven for thinking that the Old Lady of Threadneedle Street may now overcompensate and tighten policy too much at a time when the economic outlook is already fragile.
"Unlike the Fed, which has a dual mandate to manage both inflation and employment, the Bank of England has but one mission, namely to keep inflation around the 2% level.
"As such, if push comes to shove, the MPC should be prepared to risk a recession to keep prices broadly stable, even if the new government is unlikely to be too thrilled about the prospect of any economic downturn as it seeks to curry favour with the electorate ahead of the next general election, which must take place by early 2025 at the latest."
Watch: How does inflation affect interest rates?