Sterling has extended its decline to slip below $1.12, the currency’s weakest point since 1985, as the economy veers towards a recession and the government prepares a mini-Budget in which it promises a number of tax cuts.

Friday’s 0.75 per cent decline brings the drop for the year to more than 17 per cent, putting the currency on track for its worst year since 2008 when it lost more than a quarter of its value against the dollar.

Sterling’s drop on Friday overshot the euro’s 0.6 per cent decline against the dollar in early trading.

Much of the move is due to the strength of the dollar, which is at its highest against a basket of peers since mid-2002, propelled by concerns over the global economy and aggressive interest rate rises from the US Federal Reserve.

On Friday the dollar index rose 0.5 per cent to push its monthly gains to 3 per cent. The index has advanced 17 per cent over the year.

The UK economy has weakened over the past few weeks with the Bank of England now believing it has shrunk over two consecutive quarters, which technically would be a recession.

The central bank this week lifted interest rates by 50 basis points to 2.25 per cent, the highest since 2008, meaning borrowing will become more expensive for businesses and households. It expects inflation to peak at 11 per cent in October from its current 9.9 per cent, a near 40-year high, further eroding households’ real incomes.

UK chancellor Kwasi Kwarteng will on Friday attempt to deliver shock treatment to Britain’s stagnating economy, with a 30-point growth package to turn “the vicious cycle of stagnation into a virtuous cycle of growth”.