Sterling fell to a two-year low as the political landscape added to uncertainty in an already strained economy.
The pound fell to US$1.1867 on Monday afternoon, its lowest level since March 2020. It was slightly firmer at US$1.19 shortly before 5:00 p.m.
It came days after the resignation of Boris Johnson as Prime Minister and the start of the race to replace him.
The political situation is compounding the UK’s bleak economic outlook – inflation, the risk of recession, Brexit and pressure on the cost of living are already taking their toll.
Meanwhile, key U.S. inflation data sent the dollar higher this week as investors sought low-risk currencies.
Against the euro, the pound fell slightly to 84.80 pence.
Rabobank strategists said it was not yet clear whether Mr Johnson’s resignation would be enough to ensure economic “coherence”.
They said in a note: “While pound investors will be hoping the government will be less distracted by the scandal and more focused on ensuring the economy is coherent post-Brexit, the jury is still out.
“The pound may suffer from a lack of fresh direction until there is a new prime minister.”
The UK’s latest monthly GDP figures will be released this week and are expected to show no growth in May, raising fears that second-quarter data will show an economic contraction.