Graphic: World FX rates in 2020 http://tmsnrt.rs/2egbfVh
Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv
(Updates text and prices throughout, adds quotes)
By Harry Robertson
LONDON, Sept 29 (Reuters) - Sterling fell as much as 1% on Thursday before cutting some of its losses, as the dollar wavered and British Prime Minister Liz Truss defended the government's economic plans that have contributed to the drop in the pound.
Truss said big tax cuts were the right path for Britain and refused to consider reversing the so-called "mini budget" laid out last week, which triggered chaos in markets.
The pound was last down 0.3% to $1.0854 after hitting a session low of $1.0764. However, the euro was 0.12% lower against sterling at 89.27 pence.
Adam Cole, head of foreign exchange strategy at RBC Capital Markets, said the driver in the market was the dollar, which picked up in Asian trading but later fell back somewhat.
The dollar index pared earlier gains after Reuters reported Chinese state banks have been told to be prepared to sell the U.S. currency in favour of the yuan.
Sterling crashed to a record low against the dollar of $1.0327 on Monday after new finance minister Kwasi Kwarteng unveiled plans to cut taxes, particularly for the rich, and raise borrowing.
The mini budget also wreaked havoc in the UK government bond market, forcing the Bank of England to intervene on Wednesday to protect pension funds, which are big holders of long-dated gilts.
The BoE said it would buy around 65 billion pounds ($70.54 billion) of long-dated government bonds to rectify "dysfunction" in the market.
Sterling bounced 1.41% on Wednesday to close at $1.0877 as investors digested the BoE's plans.
But the currency it resumed its long-running slide on Thursday as Truss came out to defend her government's policies.
"We are facing difficult economic times," she said on local BBC radio. "I don't deny this. This is a global problem. But what is absolutely right is the UK government has stepped in and acted at this difficult time."
Jonas Goltermann, senior markets economist at consultancy Capital Economics, said both dollar strength and fears about the British economy were weighing on the pound.
"I don't think (the BoE's intervention) is going to be a long-term boost for sterling, although it might prevent an extreme downturn," he said.
Goltermann said further falls in sterling are probable. He said traders are expecting the BoE to hike interest rates above 6% but are likely to be underwhelmed.
One analyst said they were also watching for signs of more selling of UK assets by pensions funds.
Pensions funds have been heavily selling gilts in recent days after the market falls triggered calls for collateral payments on their gilt derivatives positions, analysts and pensions advisers said.
The dollar regained ground after falling back from a new 20-year high on Wednesday after the BoE's intervention. The dollar index was last up 0.17% to 113.22, after pulling back from a session high of 113.79.
Many analysts said they remained pessimistic about the pound, given the strength of the dollar and the storm clouds over the UK economy.
"There is no confidence in the Truss government right now. The problem is not fiscal spending per se, the problem is that people just don't trust what she is doing," Ipek Ozkardeskaya, senior analyst at Swissquote, said. ($1 = 0.9214 pounds) (Reporting by Harry Robertson, Carolyn Cohn and Bansari Mayur Kamdar; Editing by Angus MacSwan and Jane Merriman)