The pound has tumbled almost 3% against the US dollar - falling to its lowest level in five years on recession fears.
Sterling's fall came after the Bank of England governor, Mervyn King, warned that Britain was probably entering its first recession in 16 years.
The pound dropped to $1.620 in Asian trading, its lowest since September 2003. It later recovered to $1.6255.
The euro fell 2% to hit a two-year low against the dollar - which has itself been rising against other currencies.
The euro slid to a low of $1.2743 at one point, before recovering slightly to stand at $1.2831.
The dollar has jumped to a two-year high against a basket of currencies as investors have bet that interest rates outside the US will be cut sharply to try to bolster global growth.
Concerns there may be a deep slowdown in the world economy have prompted investors to cash in more of their bets against the US dollar which had built up in recent years.
At one point this year these bets had sent the euro to a record high above $1.60.
Currency traders said a wide range of players from hedge funds to Japanese institutional investors were now rushing to cancel their positions and cut their losses.