The pound yesterday sank to its lowest level since 1985 amid concern about the Bank of England's commitment to fighting inflation and Prime Minister Liz Truss's plans for a massive borrowing spree.
Sterling fell by as much as 1% to $1.141, the lowest since 1985.
The Telegraph says the drop came amid concerns that Bank officials will slow down their efforts to fight inflation as Ms Truss prepares a huge support package for households and businesses that will cut energy bills.
The new Prime Minister will today unveil her plans which some reports say could cost up to £200billion.
Andrew Bailey, the Governor of the Bank of England, told MPs on the Treasury Select Committee yesterday he was "very concerned" about the risk that inflation - which currently stands at 10.1% - would lead to a prolonged period of higher prices and wages.
But Huw Pill, the Bank's chief economist, appeared to dampen hopes of steep interest rate rises when he said that the prime minister's expected £2,500 annual price cap on energy bills would "lower headline inflation".
The Bank of England, which has raised rates six times in a row to 1.75%, has come under fire alongside other central banks for failing to get a grip on inflation.
Day late and dollar short
"They're all a day late, and a dollar short," said one senior banker.
"Central banks usually react to fear, rather than rational thinking - and so it's the fear of credibility that they're worried about."
Analysts said the drop in the value of the pound was also due to the UK's dire growth outlook.
"While inflation in the near term might come down, that doesn't mean the cost-of-living crisis has gone away. Government spending is a positive factor, but in terms of actual economic growth and living standards, the UK is still facing huge headwinds," said Yufuke Niyairi, foreign exchange strategist at Nomura.
The enormous cost of freezing electric and gas costs for British households and also helping hard-pressed businesses with their energy bills will become clearer when the Prime Minister speaks today.
Reports this week claimed that the total price tag could exceed £150billion and might even run as high as £200billion - almost three times what was spent on the pandemic furlough scheme.
Household energy bills are set to be frozen until 2024 - a move which could cost up to £160billion - and businesses are also expected to receive £40billion of support.
No energy price cap for firms
Unlike households, firms are not protected by an energy price cap. Many are currently facing even sharper rises in energy bills than domestic users, which could lead to businesses going under or cutting their wage bills by firing staff.
The system to support companies could be more complex than that for households and is likely to be reviewed more often. It could see the government force energy suppliers to offer specific reductions on the unit price of the energy used by firms.
The British Chambers of Commerce warned "it remains to be seen" whether the scheme will go far enough in providing the support that companies need.
Some economists have suggested that plans to cap energy bills could mean that increases in the cost of living will peak earlier and be "significantly lower" than previously forecast.
Investment bank Goldman Sachs said inflation could now peak at 10.8% in October, rather than the 14.8% forecast before. It also sees prices falling more quickly as well, with inflation slowing to 2.4% by December 2023.