Sterling took a beating on the currency markets yesterday, tumbling to a 21-month low against the dollar as continuing concerns about the health of the UK economy undermined sentiment.

Sterling took a beating on the currency markets yesterday, tumbling to a 21-month low against the dollar as continuing concerns about the health of the UK economy undermined sentiment.

The pound fell as low as $1.9122, its lowest since November 2006, before recovering.

News that the trade deficit widened in June and a survey that showed more than a third of Britain's leading businessmen expect their companies to suffer redundancies due to the economic downturn eroded confidence in the pound.

A poll of more than 1000 business leaders found 36% of them believe jobs will be lost and nearly half of employers have cut back on pay rises and on large bonuses.

Meanwhile, official data showed UK manufacturers' costs fell more than expected in July but were still nearly a third higher than a year ago.

This provided a brief boost to the pound as it marginally increased expectations that the Bank of England may be able to deliver a growth-boosting a cut in base rates before the year's end.

"There comes a point when the perception of the economy becomes so poor that any good news on the economy outweighs the impact on monetary policy," said Philip Shaw, the chief economist at Investec.

The prospect of lower interest rates usually undermines a currency as it lowers its yield advantage, but, with growth having slowed so sharply, easing UK borrowing costs could prove to be a boon.

Members of the Bank of England's Monetary Policy Committee are in a tricky situation because they cannot cut rates to boost the ailing economy because it would fuel inflation.