By Alun John and Dhara Ranasinghe
LONDON (Reuters) -Britain's battered pound fell to its lowest level against the U.S. dollar since 1985 on Wednesday, lurching lower as investors dumped British assets in the face of a bleak economic outlook and the soaring dollar.
Sterling has been hit hard by surging inflation, a looming recession and concerns that tax cuts and increased public spending under a new government could exacerbate price pressures.
The currency, down more than 15% against the dollar so far this year, is also a headache for the Bank of England since it increases the cost of imports and can cause more imported inflation.
It fell to as low as $1.1407, its lowest since 1985, according to Refinitiv data. It was last down 0.4% at $1.1475, clawing back some ground.
"For now the momentum is very negative. I would expect that the moves have been so violent that the Bank of England won't like this and may be more hawkish," said Nordea chief analyst Jan von Gerich. "There could be a recovery in sterling but I wouldn't catch a falling knife for now," he added.
Sterling hit an all-time low of $1.0545 in March 1985, just before G7 powers acted to rein in the superdollar of the Reagan era in the so-called "Plaza Accord".
The BoE meets next week and is expected to hike interest rates by 50 or even 75 basis points.
Britain's surging inflation could slow if new Prime Minister Liz Truss helps households and businesses cope with rocketing energy costs, but it is too soon to say what that will mean for rates, the BoE's chief economist Huw Pill said told lawmakers on Wednesday.
Against the euro, the pound was down 0.8% on Wednesday at 86.67, having falling to its lowest since mid-June at around 86.89 pence.
In general, sterling has held up far better against the euro than versus the dollar. It is down just 3% versus the single currency this year.
The pound had its worst month against the dollar in August since shortly after the Brexit referendum in 2016. Some British government bonds saw the biggest fall in their prices for decades.
Much of the market turmoil is due to a surging inflation rate which is the highest among Group of Seven economies.
Analysts say the direction of the pound could now be swayed by new Truss' economic plans, details of which are expected in coming days.
Truss is set to detail her plans for tackling soaring energy bills on Thursday but she has ruled out imposing new windfall taxes on energy producers. Government borrowing will pick up the tab for freezing energy bills for households and businesses.
(Reporting by Alun John and Dhara Ranasinghe; Additional reporting by Tom Wilson; Editing by Tommy Reggiori Wilkes)