LONDON BRIEFING: The dramatic slide in the currency mirrors the worsening outlook for the UK economy

A YEAR ago, Londoners were flocking to Manhattan to snap up Christmas bargains with their super-charged pounds.

Now, however, as cash-strapped domestic shoppers shun the high street, American and European tourists seem to be the only ones spending in the capital's West End stores, as they take advantage of the precipitous slide in the UK currency.

In what has all the hallmarks of a good old fashioned currency crisis, sterling has lost a quarter of its value against the euro and the dollar in the past 12 months.

Earlier this week, as the pound plummeted through the 90p level against the euro for the first time since the single European currency was launched in 1999, many economists predicted that sterling/euro parity is only a matter of time.

On UK high streets, parity between the two currencies has effectively already arrived - after commission costs, anyone buying the European currency in a bureau de change is now getting less than one euro to the pound.

The dramatic slide in sterling mirrors the worsening outlook for the UK economy and the Bank of England's moves to slash interest rates from their recent 5.75 per cent peak to a 57-year low of just 2 per cent, taking them below the European Central Bank rate, along with the prospect of more cuts to come.

Currency speculators have been blamed for sterling's slide but, while some have undoubtedly have profited from sterling's distress, there appears to be no real evidence of a co-ordinated Soros-style attack on the currency.

Short-selling speculators, led by George Soros, forced sterling out of the Exchange Rate Mechanism on Black Wednesday in 1992, even though the Treasury threw billions into the foreign exchanges in a vain attempt to defend the currency.

The government has made it clear that sterling is on its own, firmly ruling out any intervention in the markets. Inflation, not sterling, remains the real concern, according to chief Treasury secretary Yvette Cooper.

But for the government's critics, it is Gordon Brown's "reckless intervention" that has brought sterling to its knees - his policy of spending the nation's way out of recession on a mountain of debt. The deteriorating pound simply reflects the world's verdict on his economic strategy, .

Sterling's plight has revived the debate about the UK's entry into the euro, strengthening the case of the pro-euro entry camp. However, as with intervention in the foreign exchanges, that too has been ruled out by the government - in the near future at least.

As well as effectively "grounding" Britons by making overseas travel more expensive, the crumbling currency is also adding to the woes of the distressed retail sector as the cost of imported goods escalates.

Desperate high street stores are discounting as never before, Debenhams is launching a last-ditch attempt to pull in Christmas shoppers with discounts of up to 50 per cent for the next five days. This is its fourth pre-Christmas sale since last month. There is also talk of another bout of targeted price cuts by Marks & Spencer over the next few days.

The credit crunch is now firmly entrenched in the psyche of the consumer, who has become ground down by the gloomy headlines on global financial turmoil and mounting job losses. Those who are still employed have tightened their belts for fear of what is to come, ushering in what is being seen as a new "age of austerity."

Asda chief executive Andy Bond is not alone in predicting a sea-change in consumer behaviour as a result of the credit crunch - a change that will shape the spending habits of a generation in the same way that the post-war austerity shaped the spending habits of those who went through rationing in the 1940s and 1950s.

There is already evidence that people are getting back to basics. According to research firm Mintel, there has been a huge surge in the number of people who have turned away from expensive ready meals and are now "cooking from scratch". According to Mintel's figures, the numbers creating a meal from basic ingredients has doubled from 24 per cent five years ago to 41 per cent.

Products such as bottled water have been hit with a dramatic fall in sales as shoppers cut back and there has also been a significant increase in sales of frozen foods. Moreover, according to Asda's Bond, we're buying in smaller quantities and becoming far less fussy about sellby dates.

• Fiona Walsh writes for theGuardian newspaper in London