By Kevin Buckland
TOKYO, Sept 26 (Reuters) - Sterling tumbled to a record trough on Monday as traders scampered for the exits on speculation the new government's economic plan will stretch Britain's finances to the limit.
The British pound's searing drop helped the safe-haven U.S. dollar to a new two-decade peak against a basket of major peers.
Sterling slumped as much as 4.9% to an all-time nadir of $1.0327, before stabilising around $1.05405, 2.9% below the previous session's close.
It dropped 3.6% on Friday, when new finance minister Kwasi Kwarteng unveiled historic tax cuts funded by the biggest increase in borrowing since 1972.
"Sterling is getting absolutely hammered," said Chris Weston, head of research at Pepperstone.
"Investors are searching out a response from the Bank of England. They're saying this is not sustainable."
The euro also touched a fresh 20-year trough to the dollar on simmering recession fears, as the energy crisis extends toward winter amid an escalation in the Ukraine war. A weekend election in Italy was also set to propel a right-wing alliance to a clear majority in parliament.
The dollar built on its recovery against the yen following the shock of last week's currency intervention by Japanese authorities, as investors returned their focus to the contrast between a hawkish Federal Reserve and the Bank of Japan's insistence on sticking to massive stimulus.
The dollar index - whose basket includes sterling, the euro and the yen - reached 114.58 for the first time since May 2002 before easing to 113.73, 0.52% higher than the end of last week.
"The poor situation in the UK exacerbates support for the USD, (which) can track higher again this week," Joseph Capurso, head of international economics at Commonwealth Bank of Australia, wrote in a report.
"If a sense of crisis about the world economy were to emerge, the USD could jump significantly."
Europe's shared currency slid as low as $0.9528, and last traded down 0.41% at $0.96545.
The dollar added 0.39% to 143.95 yen, continuing its climb back toward Thursday's 24-year peak of 145.90. It tumbled to 140.31 that same day after Japan conducted yen-buying intervention for the first time since 1998.
On Monday, Japanese Finance Minister Shunichi Suzuki repeated that authorities stood ready to respond to speculative moves in currency.
Elsewhere, the risk-sensitive Australian dollar slipped to $0.6487, its lowest since May 2020 and was last trading 0.22% weaker at $0.6516.
Fellow commodity currency the Canadian dollar reached a fresh trough at C$1.3625 per greenback, its weakest since July 2020.
China's offshore yuan slid to a new low of 7.1630 per dollar, its weakest since May 2020.
The People's Bank of China said on Monday it will reinstate foreign exchange risk reserves for some forwards contracts, a move that would make betting against the yuan more expensive in order to slow the pace of recent depreciation.
(Reporting by Kevin Buckland Editing by Shri Navaratnam and Sam Holmes)