Sterling fell heavily overnight to just above parity with the US dollar as the markets grew increasingly nervous over the level of borrowing required by the UK government to support its tax-cutting plans.

The pound fell by more than 4% to just $1.0327 in early Asia trade and is now at its lowest level against the dollar since decimalisation in 1971. It picked up slightly ahead of the opening of the London Stock Exchange at 8am to trade at $1.055.

The extent of the fall has led to speculation that the Bank of England may need to step in to impose another hefty rise in interest rates, or enter the foreign exchange markets to buy sterling.

Chancellor Kwasi Kwarteng and Prime Minister Liz Truss used weekend interviews to defend the tax cuts and other support for households and business which will add £70 billion to government borrowing.

Ms Truss was asked whether she was “recklessly running up the deficit. She replied: “I don’t really accept the premise of the question at all.”

The chancellor said the announcements in his Fiscal Event, or mini-budget, were only the start of the government’s plans to revive the economy which the Bank of England believes is now in recession.

Economists, including the Bank of England policymaker Jonathan Haskel, are pointing to the apparent contradiction of the government pumping money into the economy while the Bank is raising interest rates to control inflation.

Mr Kwarteng and the Prime Minister are hinting at further cuts in income tax and the loosening of immigration rules along with other regulations to speed up planning to get infrastructure projects under way.

He said: “We’ve only been here 19 days. I want to see, over the next year, people retain more of their income because I believe that it’s the British people that are going to drive this economy.”

However, there are murmurings of a rebellion among Tory backbenchers, who could refuse to vote for the government’s finance bill if the pound continues to plummet.

Economists had warned that the Chancellor’s tax-cutting ambitions could put further pressure on the pound, which has also been impacted by strength in the US dollar.

Former Bank of England policy maker Martin Weale cautioned that the new Government’s economic plans will ‘end in tears’ – with a run on the pound in an event similar to what was recorded in 1976.

However, the currency crisis is not limited to the UK. Other currencies are weakening as the dollar strengthens.

The Canadian dollar plunged to its weakest since July 2020. China’s offshore yuan slid to a new low of 7.1630 per dollar, its weakest level since May 2020. The Australian dollar touched $0.6510, its lowest since mid-2020. Japan intervened in the foreign exchange market on Thursday to buy yen for the first time since 1998.