The possibility of an earlier-than-expected rise in US interest rates sent the dollar soaring against the pound.
Sterling fell by a cent, or 0.8%, against the US currency to $1.2371.
Neil Wilson at ETX Capital said the move came a member of the US Federal Reserve said he would support a rate rise in March.
He added that had “thrown the cat among the doves a bit” as the last meeting of the US central bank had suggested a rate move was not likely until summer.
On the stock market, the benchmark FTSE 100 index opened higher, rising 28.78 points to 7,200.93.
Housebuilders were among the biggest gainers, as the government prepares to unveil plans to build more affordable houses in England. Shares in Barratt Developments rose 2.6% and Taylor Wimpey climbed 2.4%.
BP shares were down 2.5% after the oil giant’s latest profits fell short of expectations. The company reported underlying replacement cost profit of $400m for the fourth quarter, but analysts had hoped for $560m.
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