Pound's peril is in a different world to 1985

Sterling is squarely in the crosshairs of the currency markets.

On Tuesday morning it fell to a fresh 31-year low, tumbling to $1.27.34, a level even lower than it plumbed in late June, in the immediate aftermath of the historic vote to leave the EU.

It has also fallen sharply against the euro, against which it has fallen by more than 15% this year so far, compared with a year-to-date fall of just 12% against the US dollar.

Analysts at Citi, one of the biggest participants in the foreign exchange market in London, have been telling clients on Tuesday morning that there is scope for sterling to go as low as $1.24.5 from here.

:: FTSE 100 nears record as pound sinks

The main reason for this fall is not hard to ascertain. Theresa May made clear at the weekend that Article 50 of the Lisbon Treaty will be triggered before the end of March next year .

In other words, the next two years are going to be full of speculation about the nature of Britain's relationship with the EU before it finally leaves the union in early 2019, with much now depending on the kind of deal that can be thrashed out.

Those selling the pound are taking the view that this will invariably lead to a hit to the economy and particularly now that Mrs May and other cabinet ministers have been making it clear that Britain is going to put a greater priority on controlling its borders than it is on membership of the EU's single market.

That is not a message that either business or the City of London (LSE: CIN.L - news) will want to have heard.

At the same time, though, the FTSE 100 index has clambered back above 7,000, a level last breached in May 2015, following the Conservative election victory. Again, this is not difficult to explain.

A very significant number of constituents of the FTSE 100 derive their earnings in foreign currencies like the dollar and the euro, that are flattered when translated back into a struggling pound. This is particularly the case for some of the biggest and most important companies in the index, such as BP and Shell (LSE: RDSB.L - news) , which have been lifted today by a move in the cost of Brent crude back above $50 per barrel.

All of the biggest gainers on the index on Tuesday, such as the educational publisher Pearson (Xetra: 858266 - news) , the building materials group CRH (EUREX: 558474.EX - news) , the aircraft engines' maker Rolls-Royce and the testing and quality standards company Intertek, derive most of their earnings in the US dollar or the euro.

It is also worth bearing mind that, expressed in dollar terms, the FTSE 100 is still actually around 5% LOWER than it was before the vote to leave the EU.

Ah, some will argue - but isn't the far more domestically-orientated FTSE 250 also up to levels last seen in May last year? To which the answer is yes, it is. But that has nothing to do with investors taking an optimistic view of the UK economy in a post-Brexit world and everything to do with the fact that many of the members of the mid-cap index are major exporters who will hope to have seen a boost to overseas sales as a result of the drop in sterling.

And both indices are also being helped by the fact that shares still represent good value compared with bonds, whose value has been pushed higher by the Bank of England's recent decision to restart asset purchases, along with similar quantitative easing from the likes of the Bank of Japan and the European Central Bank.

One thing that is reasonably likely, unless prospects for the UK economy rapidly deteriorate from here, is that the low that the pound clocked up against the US dollar 31 years ago will not be exceeded.

On 26 February that year, the pound traded as low as $1.052 at one point, a reflection of the greenback's strength not only against sterling but also against other major international currencies such as the yen, the French franc and the deutschemark.

On that occasion, the dollar reigned supreme against all currencies, prompting a meeting in New York in September that year - the so-called Plaza Accord - in which the finance ministers of the US, Japan, the UK, France and West Germany agreed on co-ordinated action to try and bring about a decline in the dollar against the yen and the deutschemark in particular.

Those were different times back then - those five nations were easily the world's largest economies, the Iron Curtain was still in place, there was no euro and Deng Xiaoping's economic reforms in China had yet to fully catapult that country into a global economic power.

But that sterling has fallen to levels last seen in 1985, when the world was such a different place, only goes to show the plight that the currency is in today.