Goldman-Sachs warn it could reach as low as $1.20
The pound has plumbed new depths, as intensifying fears over the impact of Britain leaving the EU is causing investors to suspend trading in the UK commercial property market.
It was a new 31-year low for sterling, which has already tumbled steeply in the wake of last month's referendum result.
It dipped below $1.28 for the first time since 1985 at one stage, before recovering slightly to close down 0.8% at $1.29.
A weak pound means higher prices for British holidaymakers and makes imported goods including many supermarket staples more expensive, though it can help exporters sell their wares abroad as they will be cheaper for foreign buyers.
Meanwhile, there were sharp share price declines led by supermarkets as figures showed the sector was still in the grip of sliding food prices and a report from analysts at HSBC suggested there would be more to come.
The pound has been dragged lower in recent days as three more British commercial property funds worth about £10bn suspended trading, after the referendum prompted a rapid increase in investors trying to cash in their holdings.
Henderson Global Investors announced it had suspended trading in its £3.9bn UK property fund due to "exceptional liquidity pressures" created by the uncertainty the Brexit vote had created alongside other suspensions.
Within the hour, Columbia Threadneedle and Canada Life followed suit, announcing that they had also suspended their UK property funds.
Aviva Investors blamed "extraordinary market circumstances" as it halted dealing in its UK property trust, a day after a similar move by Standard Life Investments.
M&G Investments also suspended a major property portfolio.
The trend has prevented investors from getting their money back and prompted a rise in calls from savers to Britain's Financial Ombudsman Service.
"It is certainly too early for formal complaints about this issue, however, we have begun to see initial enquiries come through from concerned consumers," a spokeswoman said.
"Although the decision to suspend redemptions was expected, the extent of the suspensions by the three funds so far is quite troubling."
Stock markets were also on the back foot on Wednesday, with the FTSE 100 down by 81.8 points, wiping more than £21bn off the value of its constituent companies.
As well as supermarkets, house builders were also seeing falls, with shares at Barratt Developments dropping 17.7p to 332.6p and Taylor Wimpey dropping by 5.4p to 115.9p.
The FTSE 250 index - more representative of UK businesses than the globally-focused FTSE 100 - closed down 64.97 points at 15669.7.
In Europe, Germany's Dax and France's Cac 40 were each down by about 2%.
Meanwhile, economic survey data pointed to a second quarter slowdown in gross domestic product (GDP) growth to just 0.2% - fuelling expectations that the Bank of England could cut interest rates as soon as next week.
The bank has stepped up efforts to allay the potential volatility from Brexit by easing capital rules for banks, allowing them to expand lending to households and businesses by up to £150bn, however this has failed to halt the pound's slide.
Governor Mark Carney said pre-referendum warnings about what might happen in the event of a Brexit vote had "begun to crystallise" - including a hit to commercial property - and that the UK "has entered a period of uncertainty and significant market adjustment".
Angus Nicholson, market analyst at IG, said: "Mark Carney, almost the only British leader who seems to not be resigning at the moment, emphasised the challenges the UK economy will suffer in the post-Brexit world. Carney's speech seems to have initiated the dawning of realisation of the longer-term impact of Brexit for many in the markets."