Mounting expectations of a rate cut from the Bank of England this week saw the pound fall to a record low against the euro today.
The cost of a euro rose above 80p - hitting UK holidaymakers planning trips to Europe - reaching its highest level since the single currency was introduced in 1999.
The euro has gathered increasing strength against the pound as the European Central Bank (ECB) has held rates steady since last June despite financial turmoil.
This compares with the Bank of England's two cuts since the start of the credit crunch - and a third quarter-point cut to 5 per cent expected tomorrow.
The ECB is keeping borrowing costs at 4 per cent because of concerns over inflation in the eurozone, although traders are expecting cuts later in the year.
Mark Outten, senior dealer at spread betting firm GFT Global Markets, said: "The ECB is still talking tough on rates but whether they will be able to hold that stance as the pressure grows remains to be seen.
"We are pencilling in rate cuts later this year but until then there will be pressure on sterling."
The hard-line approach of the ECB contrasts with the gradual easing of borrowing costs from the Bank's nine-strong Monetary Policy Committee (MPC).
While concerns over inflation - fuelled by rising food costs, energy bills and petrol costs - have prevented policymakers from implementing the drastic rate cuts seen in the US since the start of the credit crisis, the MPC is keen to avoid a sharper-than-expected slowdown in the UK's economy.
Most economists predict at least one more rate cut this year following tomorrow's anticipated move lower.
This is likely to put more pressure on the pound if the ECB waits longer before cutting rates. The dollar, meanwhile, has been heavily hit by the US Federal Reserve cutting rates by 3 per cent. It is trading at 1.96 against the pound and 1.57 against the euro.Reuse content