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 $1.05425, 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 114.02, 0.78% higher than the end of last week.
"The dollar strength was in large part because of the heavy selling of the sterling," said Saktiandi Supaat, regional head of FX research and strategy at Maybank.
"It's more of a risk-off sort of thing," Supaat added. "Global recession fears have actually intensified and widened quite broadly."
Europe's shared currency slid as low as $0.9528, and last traded down 0.71% at $0.9623.
The dollar added 0.54% to 144.175 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 slumped to $0.64865, its lowest since May 2020, and was last trading 0.6% weaker at $0.6491.
Fellow commodity currency the Canadian dollar reached a fresh trough at C$1.3636 per greenback, its weakest since July 2020.
China's offshore yuan slid to a new low of 7.1728 per dollar, its weakest since May 2020.
Onshore, the yuan also touched a 28-month trough of 7.1690, just shy of the day's downside trading limit, set by the People's Bank of China.
The fresh lows came even as the central bank 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 and slow the pace of its recent depreciation.
(Reporting by Kevin Buckland; Additional reporting by Rae Wee; Editing by Shri Navaratnam, Sam Holmes and Ana Nicolaci da Costa)