The pound fell below DM2.40 in the Far East, but spent most of the London trading day a little over DM2.41. It recovered in the afternoon to close at DM2.4206 as dealers who had borrowed sterling to sell it bought it back again to square their positions.
The statement by Michael Heseltine, President of the Board of Trade, in the Commons also helped to ease concerns over the Government's political problems.
Against the dollar, the pound ended 2.85 cents lower on the day at dollars 1.6310. Against a basket of other currencies the pound lost 1.2 percentage points to close at 79.5 per cent of its value in 1985.
Investors believe the Government is prepared to cut interest rates in the short term to promote recovery, but might have to raise them later to deal with a rise in inflation. This produced a steepening in the yield curve - a fall in short-term market interest rates and a rise in long-term rates as investors moved their funds from late-maturing government bills to early-maturing ones.
Nigel Richardson, economist at Warburg Securities, said base rates could be down to 7 per cent by the end of the year, perhaps in two half-point cuts.
Economic gloom also weighed on the stock market, although the fifth anniversary of Black Monday passed without a repeat performance. The FT-SE index of 100 leading shares was down more than 20 points soon after the market opened, but recovered to close 1.7 points down at 2,562.2.
Hopes that interest rates could fall further came as Britain's biggest mortgage lender, Halifax Building Society, cut its rate to 9.29 per cent - a shade above the 9.25 per cent set by Abbey National.
Halifax, which has 1.8 million borrowers, will bring down the rate in two stages for existing customers. The rate drops from 10.65 to 9.99 per cent on 1 November and then to the new rate on 1 December. Discounts for first-time buyers (which last until January 1994), and those for larger loans and customer loyalty can reduce the rate further.
A first-time buyer borrowing less than pounds 60,000 with less than 10 per cent for a deposit would pay 8 per cent for the first year.
FRANKFURT (Reuter) - Deutsche Bank appears to have won a mandate to joint lead manage a DM5bn ( pounds 2.07bn) bond issue by the UK Government. Market sources said the issue was likely to be formally announced this week.