The pound sank after the government’s senior law officer said the legal risk of the UK being tied to EU rules after Brexit “remains unchanged”.
Currency traders fear that the attorney general’s advice means Theresa May’s revised Brexit deal does not deal with objections from pro-Brexit MPs.
According to Geoffrey Cox, the UK may not be able to leave the Irish backstop without the EU’s agreement.
The pound fell from £1.17 to £1.15 against the euro in a few minutes.
Sterling also fell two cents against from £1.32 to £1.30 against the dollar.
“Sterling took a nose dive on the back of the Cox statement,” said ThinkMarkets analyst Naeem Aslam said the pound had taken a “nosedive”, adding: “It was his [Mr Cox] opinion which matters the most, now that he has made it clear that the recent deal has no weight, the door is wide open for the sterling to move lower against the dollar.”
The attorney general’s legal advice is seen as vital to determining whether Tory Brexiteers and the DUP back the deal.
Mr Cox’s advice will weigh heavily MPs when parliament votes on the new version of the deal on Tuesday.
Theresa May said she had achieved “legally binding” changes to her Brexit deal which addressed the possibility of the temporary divorce arrangement known as the “backstop” becoming permanent if the UK wished to end it.