LONDON: Sterling slipped against a firmer dollar on Wednesday and could lose further ground on worries about US fiscal problems which have the potential to derail US and global growth.
Along with the euro, the pound typically falls during times of heightened concerns about the global economy.
Lingering concerns about a weak UK economy also continued to weigh on the pound, with Bank of England Deputy Governor Charlie Bean saying in an interview that the door was still open for more monetary easing.
The pound fell 0.2 percent on the day to $1.5990, bringing it well below Tuesday's three-week high of $1.6056. Strategists said its break below the $1.60 level could open the door to further losses.
"The US fiscal cliff story will develop over the next few weeks and, with that in mind, cable (sterling/dollar) could be in trouble," said Nawaz Ali, analyst at Western Union.
This could see it slide towards the mid-November low of $1.5828, he said.
Comments by US Senate Majority Leader Harry Reid on Tuesday about the lack of progress by Democratic and Republican lawmakers fanned concerns about whether a deal can be reached to avert the so-called 'fiscal cliff', which would see a raft of spending cuts and tax rises.
If an agreement is not reached, the world's largest economy could fall back into recession. This would boost safe-haven demand for currencies like the dollar and yen which tend to benefit during times of economic uncertainty.
Concerns about how a deal on Greek aid will be implemented and a warning by Fitch ratings agency of a possible downgrade of France also weighed on the euro against the dollar, pushing the pound down with it.
"It is quite worrying in cable (sterling/dollar) that it really hasn't been able to make much traction above $1.6050. It is being moved by where the dollar is going," said Kathleen Brooks, research director at FOREX.com.
Short-term, the pound could drop towards chart support at the 21-day average of $1.5965, and then towards $1.5912, the 100-day average.
The euro was steady against the pound at 80.75 pence but stayed well below a one-month high of 81.145 pence hit after euro zone officials agreed a deal on a new debt target for Greece on Tuesday.
Investors soon took profits on the euro's recent rise as worries lingered about euro zone debt and economic problems.
UK WORRIES
Sterling is seen by many as a safer bet than the euro and with the crisis in the euro zone far from a lasting resolution, safe-haven flows into the pound could keep it firm against the euro in the near-term.
"The British pound is not reacting to fundamental data with the sensitivity that it historically has done because we have quite a serious crisis in Europe," said Adam Myers senior FX strategist at Calyon. "That is forcing safe haven flows into the pound over the euro."
Still, investors were wary of building long positions and betting on more gains for sterling.
Analysts said that unless the UK's growth prospects improved, any bounce for the currency would be shallow and sellers would emerge at higher levels.
The pound rose on Tuesday after figures confirmed upbeat third-quarter UK economic growth. But markets braced themselves for the possibility of weak data in the fourth quarter.
Bank of England Governor Mervyn King told lawmakers on Tuesday that the chances of a rapid recovery in 2013 and 2014 were not very great.
Attention next week will turn to British finance minister George Osborne's statement to parliament on Dec. 5.
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