LONDON Sterling plummeted as much as 10 cents in just a few minutes of Asian trading on Friday, a "flash crash" that fuelled concerns about the vulnerability of the British currency while adding to the allure of the country's corporate sector.
The pound recovered from the fall, which took it as low as $1.1491 and was driven, dealers said, by the automated algorithmic computer trades that now dominate the global foreign exchange market.
But it was still down 1.4 percent on the day and trading below $1.25 for the first time since 1985.
Gains in shares of internationally focussed UK firms, which boost overseas revenues and competitiveness every time the currency falls, drove the FTSE 100 index half a percent higher while other European stock markets fell.
Sterling's battering, however, added to pressure on UK government bonds, pushing 10-year gilt yields 9 basis points higher to 0.951 percent, their highest since the days after Britain voted to leave the European Union on June 23.
"We can dismiss what happened in Asia, but the bias for sterling's performance remains downward," said Neil Mellor, a currency strategist with Bank of New York Mellon in London.
"The speech by (Prime Minister Theresa) May this week thrust the prospect of a 'hard' Brexit upon the market. The fact is that the bias to the downside is going to remain there until we see some details from the negotiating table."
Sterling has been falling steadily for a fortnight, hurt by concerns among investors that the government's intention to prioritise immigration controls over access to the single market in exit talks will spark deeper cuts to foreign investment in Britain.
Major custodial banks and asset managers say pension funds and other big long-term fund investors have responded by buying British shares and other assets while hedging the currency risk through options and other derivatives that allow them to sell the pound.
The worry is that at some stage the broader political and economic concerns that are afflicting sterling begin to bleed into a more general sell-off of UK assets.
"The combination of collapsing currency and concerns about fading monetary support for the UK asset markets could stoke fears about a balance of payment crisis and a disorderly selloff in the pound," analysts from French bank Credit Agricole said in a morning note.
(Additional reporting by William Schomberg, Atul Prakash and Anirban Nag; editing by John Stonestreet)