Sterling slid to three-month lows in Asia on Monday with investors spooked anew by concerns over Britain's divorce from the European Union, while US policy uncertainty lingered ahead of President-elect Donald Trump's inauguration.
Regional share markets were hesitant. MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.5 per cent, Japan's Nikkei lost 0.6 per cent and Shanghai shed 1.4 per cent.
Spread betters pointed to likely opening gains for UK shares, but a drop for German equities.
All the early action was in currencies where the pound sank as low as $1.1983, depths not seen since the flash crash of October, having finished around $1.2175 in New York on Friday. It was last down 1.2 per cent at $1.2032.
Dealers said the market was reacting in part to a report in the Sunday Times that UK Prime Minister Theresa May will use a speech on Tuesday to signal plans for a “hard Brexit", quitting the EU's single market to regain control of Britain's borders.
Investors have been worried such a decisive break from the single market would hurt British exports and drive foreign investment out of the country.
“It is impossible to say by how much a hard Brexit could weaken GBP, but we do not believe that a further 5-10 per cent depreciation should be regarded as an extreme scenario when set aside the UK's high dependence on foreign capital,” wrote analysts at JPMorgan in a note.
The flight from sterling benefited the safe-haven Japanese yen, with the pound down 1.5 per cent to 137.34 yen while the US dollar dipped to 114.17.
Against a basket of currencies, the dollar was up 0.3 per cent at 101.510.
The euro pared initial losses to stand at $1.0611.
Waiting on reflation
The dollar index put in its worst weekly performance in more than two months last week as investors reconsidered the whole "reflation” trade - that Trump's promises of debt-funded fiscal spending and lower taxes would stoke inflation and drive the Federal Reserve to raise interest rates faster.
Fed Chair Janet Yellen will have an opportunity to lay out her thinking with speeches on monetary policy scheduled for both Wednesday and Thursday this week.
All eyes will then be on Trump's inauguration on Friday for any clarity on his economic plans.
“The market is showing greater reluctance to push on with reflation-type trades without more details of proposed fiscal spending plans and the economic data to back it up,” said analysts at ANZ in a research note.
“It looks as though more than just reasonable data will be needed to see yields and the dollar push higher again. Some decent positive surprises may be necessary for the market to gain conviction.”
Asian markets are also waiting anxiously to see if Trump makes good on a campaign pledge to brand Beijing a currency manipulator on his first day in office, and starts to follow up on a threat to slap high tariffs on Chinese goods.
Analysts fret that the spectre of deteriorating US-China trade and political ties is likely to weigh on the confidence of exporters and investors worldwide.
Wall Street ended last week mixed, with the Dow off slightly but the Nasdaq at a record high.
Sentiment this week could be driven by results from the major banks with Morgan Stanley, Citibank and Bank of New York Mellon among those reporting.
In commodity markets, oil prices inched higher after shedding around 3 percent last week. Brent crude was up 18 cents at $55.63 a barrel, while US crude rose 16 cents to $52.51.
Spot gold added 0.5 per cent to $1,203.00 an ounce.