Sterling fell to a six-week low against the dollar on Wednesday as worries about the euro zone debt crisis weighed on riskier currencies and supported safe haven demand for the dollar.
Market players were concerned that new talks to rescue Belgian-French bank Dexia may increase the fiscal burden on France, while a survey showed German manufacturing activity contracting, leaving investors increasingly averse to taking on risk.
Sterling also remained under pressure due to growing evidence of UK economic fragility and aggressive monetary easing by the Bank of England.
Minutes to this month's BoE policy meeting are due at 0930 GMT. They are expected to reveal a readiness to extend quantitative easing further after the central bank opted for a second round of QE in October to aid a struggling economy.
The pound fell 0.5 percent on the day against the dollar to $1.5563, its weakest since mid-October and breaking below reported option barriers at $1.5580, traders said. Further falls could see a test of $1.5500, a level which proved stiff resistance on several occassions in early October.
"Downward pressure remains on sterling against the dollar as there are growing signs of the risk of recession in the UK as well as in Europe," said Lee Hardman, currency economist at BTMU.
"We prefer to be short the pound relative to the dollar," he said, but added sterling was likely to "grind higher" versus the euro due to investors seeking alternatives to the euro as the debt crisis worsens, with euro zone bond yields continuing to rise.
Analysts said the BoE minutes were unlikely to contain anything that would surprise the market after the BoE flagged the chance of more QE last week with lower growth and inflation forecasts. However, they said the release may weigh on the pound by highlighting risks to the UK economy.
"A dovish tone is expected to prevail, leaving sterling vulnerable ... The sterling/dollar decline has gained momentum so far this week, and we now anticipate a return to the $1.5270 October lows," analysts at Morgan Stanley said.
The euro was steady at 86.40 pence, off a three-week high of 86.65 hit on Tuesday when it stopped shy of resistance at the 55-day moving average, currently at 88.64 pence.
In a speech on Tuesday, BoE Deputy Governor Paul Tucker said the BoE's credibility would be tested, given it has implemented more QE on the assumption that inflation would fall sharply. He added it was important not to get too downbeat about the economy's medium-term prospects.
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