Sterling continued to slump against the US greenback, falling as much as 0.7% against the currency to $1.1305, its lowest since March 1985.
It has since pared losses slightly but is down over 16% against the dollar this year, putting it on track for its worst year since 2016 – when the Brexit referendum outcome spooked UK markets.
Against the euro, the pound was up 0.3% to 87.32p. The euro also weakened against the dollar, while safe-haven government bonds rallied.
"The pound remains on the back foot," says analyst Valentin Marinov at Crédit Agricole.
In a rare national address, Russian president Vladimir Putin revealed the partial mobilisation of forces in Ukraine. He also accused the west of planning to destroy Russia and of using nuclear blackmail.
He said Moscow would use “all means available to us”.
The announcement fuelled demand for the safe-haven dollar. Investors are also piling into the currency ahead of an expected rise in interest rates by the Federal Reserve this evening.
“His speech sent the Russian rouble lower and oil prices sharply higher amid escalating tensions after a partially successful counterattack by Ukraine,” Victoria Scholar, head of investment, at Interactive Investor, said.
Read more: UK economy slows as demand falls in August
“The pound has fallen to the lowest level since 1985 against the US dollar ahead of the Fed’s interest rate decision tonight and the Bank of England’s (BoE) rate decision tomorrow.
“Markets anticipate a 75 basis point hike from the Fed and the BoE amid a synchronised global shift towards higher interest rates to curtail spiralling price levels.”
Financial markets are now priced for 200 basis points of hikes over the next three interest rate decisions, implying that Threadneedle Street will need to raise rates by 75bp points at two of those meetings.
It also came as a former BoE official tweeted that the pound should be shorted.
Short the pound
— Professor Danny Blanchflower economist & fisherman (@D_Blanchflower) September 21, 2022
Danny Blanchflower, now a Dartmouth College economic professor, hit out at Liz Truss’s “disastrous” economic policies, which he said were in “total disarray”.
He also expanded on his concerns about the outlook for the UK economy, which is expected to tip into recession later this year, suggesting investors should short the pound.
Watch: How does inflation affect interest rates?