British pound
Illustrative image Image Credit: Bloomberg

London: The pound fell to a fresh 37-year low against the dollar Friday as traders grow increasingly worried about the economic outlook with central banks ramping up interest rates to fight runaway inflation.

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Sterling fell as low as $1.1170 - its weakest since early 1985 - after the Bank of England on Thursday hiked borrowing costs by 50 basis points. That followed a three-quarter-point lift by the Fed on Wednesday and a warning of more to come.

The Bank of England on Thursday said it believes the economy shrank in the second quarter and will continue declining in the third, meeting the technical definition of a recession.

The UK currency has fallen around 16 per cent this year. While that has mostly been a story of broad dollar strength, with almost all major currencies succumbing to the greenback, it also reflects the prospect of a UK recession and political uncertainty with a new government.

Household budgets are being squeezed from inflation near a 40-year high.

A plan by Prime Minister Liz Truss to subsidise energy bills for households and businesses could ease the pain this winter, but may not be enough to restore growth. Investors have also been unsettled by indications that the government will pay for its energy program, which could cost as much as $171 billion, by sharply increasing the UK national debt.