Dollar Rises in Thin Trade; Sterling Sinks

The U.S. dollar was firmer at the start of 2009 Friday as investors sold the euro after data showed deepening recession in the euro zone.

Demand for the single currency also fell as traders deemed the euro's rapid advance versus the greenback last month was unsustainable. Thin trading volumes during the holidays may exacerbate currency moves, they added.

"Indeed markets are thin as many are opting to take today off," said Dustin Reid, director of FX strategy at RBS Global Banking & Markets in Chicago. "As a consequence, we will not likely see full liquidity back into markets until next week or possibly even the week after."

Euro-zone manufacturing activity fell to the lowest in the survey's 11-year history. The final reading of the Markit Eurozone Purchasing Managers Index (PMI) for the manufacturing sector fell to 33.9 in December, below market forecasts.

In midday trading in New York, the euro was down 0.3 percent against the dollar at $1.3936, having earlier hit a session low of $1.3841.

Still, the dollar pared some of its earlier gains versus both the euro and the Japanese yen after a report showed an index of manufacturing activity fell more than expected in December. The dollar was last up 0.2 percent at 90.96 yen , after trading as high as 91.45.

Investors have shunned the dollar and shifted into euros recently as the U.S. Federal Reserve cut interest rates to near zero, while the European Central Bank has adopted a more gradual approach to cutting interest rates.

"Currency markets will struggle to balance the euro's upside from interest rates not being cut aggressively with the concern that the economy is destined for a sharp deterioration on the back of this measured policy reaction," said Daragh Maher, currency strategist at Calyon in London.

The dollar index, a gauge of its performance against six major currencies, rose 0.3 percent to 81.392 .

Sterling Falls

Meanwhile, sterling resumed its downtrend in choppy trade, after data painted a gloomy picture of the UK economy.

The euro was up 0.6 percent against sterling at 95.98 pence , after dropping more than 1 percent in Asian trade. It had hit a record 98.05 pence earlier this week.

The pound was also down 0.6 percent against the dollar at $1.4514 .

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British mortgage approvals for house purchases fell to a record low in November , while a separate Bank of England survey showed credit conditions looked set to tighten further in the next three months .

House prices also fell by a bigger-than-expected 2.2 percent in December, the country's biggest mortgage lender Halifax said "There just doesn't seem to be any floor at the moment to any of the housing market data," said Matthew Sharratt, UK economist at Bank of America.

The figures reinforced expectations the BoE will cut key interest rates by at least 50 basis points next week from the current 2 percent.

In the U.S., an industry report showed factory activity fell to a 28-year low in December. The Institute for Supply Management said its index of national factory activity fell to 32.4 — the lowest since 1980 — from 36.2 in November.

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