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'Flash crash' for pound to $1.18 is surrounded in mystery

The pound has endured a temporary collapse in mysterious circumstances, sparking market chaos.

Having traded as low as $1.26 to the dollar on Thursday it slumped to $1.18 within minutes during Asian trading - a fall of more than 6%.

Several theories abound as to why, with no clear explanation at hand.

They include the publication of a report by the Financial Times on French president Francois Hollande demanding a tough stance on Brexit negotiations triggering a computer-generated trading algorithm.

IG Markets' analyst Angus Nicholson said it "looks like it was an algorithm-driven flash crash", adding that "given low volumes in the Asian session, it would have forced other algorithms to join in and magnify the fall."

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Other possible reasons include a so-called 'fat finger' trade - human error.

The currency later went on to recover to $1.24 in jittery trading towards the end of what has been a roller coaster week for sterling in the wake of the EU referendum fallout.

Investors were spooked by confirmation that the prime minister would trigger Article 50, the official Brexit process, by March next year and comments the market saw as Britain keen to leave the European single market so the Government could tighten its grip on immigration.

The pound had been trading near $1.30 on Monday before starting its latest decline.

Its erosion in value helped lift the FTSE 100 to near its record high.

The mid-cap FTSE 250 did strike a new top level - with export-facing firms and those making dollar sales seeing the biggest individual gains on both indices.

Naeem Aslam, chief market analyst of Think Markets, warned it was likely to be a "heavy day" for trading on Friday on world currency and stock markets.

He said of the pound's dramatic decline: "What we had was insane - call it a flash crash - but the move of this magnitude really tells you how low the currency can really go.

"Hard Brexit has haunted sterling," he warned.

Yosuke Hosokawa, head of the currency sales team at Sumitomo Mitsui Trust Bank, said there could be more bloodshed to come for sterling.

"We thought today's plunge was a matter of time. Negative factors were mounting against the pound, and eventually the dam broke."

He added: "We have not seen the bottom yet. Breaking the 31-year low is now in sight."