British pound hits 31-year low against U.S. dollar

The British pound hit a new 31-year low against the U.S. dollar on Tuesday as markets continued to digest the news that the U.K. seems head for a "hard" exit from the European Union.

The pound lost 1.19 cents to close at $1.2729 US. It traded as low $1.2720 US earlier in the day.

That put it below levels it hit in the immediate wake of the June 23 referendum in which Britain voted to leave the EU. The pound is also down almost 15 per cent since that monumental vote.

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Over the weekend, British Prime Minister Theresa May set a deadline of the end of March to trigger the start of the formal process to leave the EU. Invoking  Article 50 of the Lisbon Treaty, the mechanism for a country to split from the EU, means the U.K. will then have a two-year window to negotiate its new dealings with the bloc.

May said the U.K. would become "a fully independent, sovereign country" with "the freedom to make our own decisions on a whole host of different matters, from how we label our food to the way in which we choose to control immigration."

In a Tuesday commentary, BMO senior economist Jennifer Lee said a "false sense of security seemed to set in" as markets rallied following the initial shock of the June 23 referendum result.

"Then, over three months later, PM May announced this weekend that they will 'invoke Article 50 no later than the end of March next year'," Lee said. "The [pound] took a dive, despite news that September manufacturing activity expanded at its fastest pace since June 2014. It is looking real now. Both camps will now line up their best negotiators to ensure each side secures the best deal possible."

"Tighten your seatbelts. The long road to goodbye (ending March 2019) is going to be rocky," Lee said.

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The decline of the pound gave a lift to U.K.-listed stocks as investors saw companies benefitting from a weaker currency that makes British goods and services cheaper in foreign markets.

The benchmark FTSE-100 on Tuesday got to within less than a point of its all-time record high of 7,122, which was set in April 2015. The index ultimately closed up 90.82 points, or 1.3 per cent, at 7,074.32.

"The reality is the biggest stocks in the index dominate its performance, and the likes of HSBC, Royal Dutch Shell, and British American Tobacco all have international earnings which are now worth more in pounds and pence thanks to (the pound's) decline," said Laith Khalaf, senior analyst at Hargreaves Lansdown.