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LONDON: Sterling tumbled towards the $1.21 mark versus the dollar and crashed to 2-1/2 year lows against the yen on Tuesday as the growing likelihood of a disorderly Brexit led investors to hedge or cut their exposure to British assets.

Its fortunes long tied to the outcome of Britain's divorce from the European Union, sterling is suffering from an apparent panic among investors about the prospect of a no-deal Brexit - long regarded by financial markets as unlikely - materialising under the new prime minister.

The British currency has shed around 2.4% of its value since Boris Johnson took over last week and is headed for its worst monthly performance since October 2016, not long after the country voted to exit the EU.

This week's selloff shows little sign of abating, with options markets implying more pain in store -- three-month implied volatility, a contract that expires just before the Oct. 31 Brexit deadline, jumped to the highest since before March 29, the original date for Britain to leave the European Union.

Sterling traded as high as $1.32 in early-May, having fallen steadily since then, with losses accelerating since July 24 when Johnson took over with the explicit agenda of taking Britain out of the EU, whether or not transitional trading agreements are in place.

The likelihood of that outcome, which most economists say would be severely damaging for the British economy, was seen to have increased as Johnson appointed a cabinet packed with Brexit proponents. That, alongside his tough line on restarting negotiations with the EU, has lowered prospects for a last-minute deal.

"(A no-deal Brexit) is a thing that has caught the market off guard," said Simon Derrick, chief currency strategist at BNY Mellon. "There's plenty of space for sterling to suffer because when sterling moves it tends to move very sharply."

The currency plumbed a low of $1.2120 in Asian trading and was last down 0.5% on the day around $1.2159.

Against the euro is has hit its lowest since September 2017, trading around 91.605 pence and down 0.4% on the day.

It lurched more than 1% lower against the Japanese yen to the lowest since Nov. 2016, falling past the key 132.28 yen level plumbed during a 'flash crash' episode in January. Having hit a low of 131.59 it last traded around 131.98 yen per pound.

Adding to concerns is the possibility of a snap election which could well see Johnson strengthen his position -- weekend opinion polls showed him with a significant lead over the opposition Labour Party.

The current parliament is resolutely opposed to no-deal Brexit but an election that provides Johnson with a big majority could allow him to overcome that obstacle.

"Sterling isn't cheap enough to buy until EUR/GBP is the other side of 0.95 and there isn't the faintest glimmer of positive news on the horizon," said Kit Juckes, a currency strategist at Societe Generale, calling the pound "parachute-less".

Options markets suggest investors expect heightened sterling volatility in late September and into early October, when the UK and EU parliament's return from summer recess and a clearer picture of where Brexit negotiations are headed emerge.

Copyright Reuters, 2019

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