Washington: The quick rebound and relative calm in financial markets last week following Britain's vote to leave the European Union were welcome relief to investors. Many surmised that markets were now looking past the so-called Brexit risks; some even declared victory.

Not so fast.

Pound sterling notes. Photo: AP

After initially recovering from the shocking June 23 referendum results, stocks in Europe and Asia extended losses on Wednesday. While Wall Street ended up higher, US and Japanese government bond yields touched record lows as anxious investors continued to run for safety.

The British pound fell to a fresh 31-year low - to less than $US1.30 (against the Australian dollar the pound fell to the August 2013 low of $1.72) - in what some analysts see as a sign of prolonged volatility ahead for financial markets and increased contention among nations especially over currency values, which are critical in global trade and capital flows.

"It really looks like we're on the cusp of FX (foreign exchange) wars," said Christopher Vecchio, currency strategist at FXCM Inc., an online foreign exchange trading broker. "Competitive devaluations seem to be very much on the horizon."

Boris Johnson's Brexit call sparks a slide in the pound. Photo: Bloomberg

The US dollar now looks to be strengthening anew, which would further strain American exports. A stronger dollar makes US products more expensive in foreign markets, in turn pushing the Federal Reserve to stay on the sidelines of interest rate action. Minutes of the Fed's last meeting in mid-June showed policymakers were reluctant to raise rates amid "considerable uncertainty" about the economic outlook, including risks abroad.

Brexit has heightened investors' fears about a recession in Britain, the EU's second-largest economy, and a wider and protracted economic and political fallout to the region and potential spillovers to the world, including the US.

The British pound is down about 14 per cent against the US dollar since the referendum. Central banks in Europe are likely to hold down or lower rates in an effort to boost confidence and growth, which will add to the downward pressure on the pound as well as the euro.

Against the Australian dollar, the pound fell to an August 2013 low. Photo: Bloomberg

Brexit risks hang over Asia as well.

Like the dollar, the Japanese yen is a "safe-haven" currency, and it has jumped in recent days, much to the chagrin of Japanese officials who want to preserve their exports and the little economic growth that their nation has seen. Japan has signalled that it is prepared to intervene to stem the strength in the yen, which is down about 5 per cent to 101 yen per US dollar since the referendum.

China, meanwhile, has been carefully managing the yuan in the face of rising pressures. Beijing has said that its policymakers are calculating the value of the currency, also known as the renminbi, against a basket of many other currencies, not just the dollar. On Wednesday, officials set the yuan, which trades within a band of 2 per cent, at 6.6857 to the dollar. That is the weakest since late 2010.

Analysts at UBS Securities in Hong Kong said that the yuan is likely to weaken further against the dollar, forecasting it to slide to 7 to 7.2 to the greenback at the end of 2017.

That could renew tensions with Washington lawmakers and other critics, who have long accused the Chinese of manipulating its currency to gain an edge in trade.

"Brexit was clearly a deflationary shock to China; the dollar appreciated and the yuan depreciated," said David Loevinger, a former China specialist at the Treasury Department and now a top Asia strategist for the Los Angeles investment firm TCW.

Even so, Loevinger said that Beijing intervened to keep the yuan from weakening even more against the dollar, to avoid a rekindling of capital flight and panic among investors.

What's more, he said, the fact that Beijing is being more transparent about how it is setting the yuan - and not relying overwhelmingly on the dollar to calculate its value as in the past - should help to head off any currency war.

TNS