* Sterling down to lowest level vs dollar since mid-1985
* Pound's weakness gives lift to UK stocks
* FTSE 100 closes up near 2015 record highs
* FTSE 250 mid-cap index touches new record highs
* Pound's slump has hit dollar value of UK shares
(Adds fund manager quote, details)
By Anirban Nag and Sudip Kar-Gupta
LONDON, Oct 4 Sterling slid to its lowest level
in more than three decades on Tuesday on fears of a "hard
Brexit" from the European Union and its single market, although
the weaker pound sent UK stocks surging higher.
The pound has already lost 1.7 percent against the U.S.
dollar since Prime Minister Theresa May said on Sunday the
formal process to take Britain out of the EU would start by the
end of March 2017.
On Tuesday, she added the divorce from the EU will not be
"plain sailing" and there would be "bumps in the road".
The pound fell to $1.2735, its weakest since
mid-1985. Earlier, sterling also hit a three-year low of 87.65
pence per euro and a 6-1/2 year low on a
Many economists and investors fear May's government will
back a "hard Brexit" option where Britain quits the single
market in favour of imposing controls on immigration.
That could hinder inward and outward trade and constrict the
foreign investment needed to fund Britain's huge current account
deficit, one of the biggest in the developed world.
Economic activity has held up better than many had expected
since Britons voted in a June referendum to leave the EU, but
many policymakers are anxious about the prospects for future
investment. The Bank of England launched a stimulus package and
cut rates to record lows in August and may ease policy again in
coming months, which could drag the pound lower.
"Most of the key (BoE) members have expressed a willingness
to continue acting pre-emptively ... and an expectation that
more easing is likely to be necessary," UBS strategist John
"Additional stimulus would likely drive further sterling
weakness," he added, reiterating the bank's forecast for $1.20
per pound and parity with the euro by end-2017.
FTSE 100 RALLIES
UK stocks benefited from the pound's weakness.
The blue-chip FTSE 100 index, dominated by
international and export-driven companies that often benefit
from a weaker pound, closed up 1.3 percent at 7,074 points -
close to a record high of 7,122.74 points set in April 2015.
The fall in sterling has given a boost to many of the FTSE
100's international companies which earn much of their revenues
in U.S. dollars, and therefore get a currency-related accounting
lift as those dollars are converted back to pounds.
However, the slump in sterling has also impacted the U.S.
dollar value of FTSE 100 stocks, a potential negative for
overseas investors for whom the dollar is their benchmark
"Investors may feel optimistic now that the FTSE 100 has
broken through the 7,000 barrier, but we might not want to crack
open the Champagne yet," said Nick Peters, multi-asset portfolio
manager at Fidelity International.
"The market has primarily been boosted by the sharp
depreciation in sterling post-Brexit, with the pound having
fallen by around 13 percent from its pre-referendum highs.
Around 75 percent of the earnings from FTSE 100 companies come
from outside the UK, so sterling depreciation effectively makes
these earnings worth more," added Peters.
The FTSE 250 mid-cap index, whose companies are more
exposed to the state of the domestic UK economy, also closed 0.9
percent higher, having touched a record high earlier in the day.
The FTSE 250 index has gained around 24 percent since the
lows struck just after the referendum result on June 24.
The mid-caps have benefited from recent upbeat data and
surveys of British households and businesses that have led many
forecasters to drop predictions that the British economy will
slip into recession this year.
Paul Spencer, portfolio manager at Franklin Templeton's UK
equity team, added the slump in sterling also meant UK stocks
had become cheaper for overseas investors, and also more
affordable for takeover from foreign companies.
Earlier this year, technology group ARM agreed to be bought
by Japan's Softbank, while SVG Capital has also
had bid interest, with such deals helping lift UK share prices.
"The same value assessments that make UK mid-cap stocks
attractive to overseas investors could, we think, lead to
heightened levels of mergers and acquisitions in this space in
the coming year," said Spencer.
(Writing by Anirban Nag; Editing by Janet Lawrence)