Dollar, Euro Rise vs Sterling on UK GDP Shock

The dollar and euro soared against sterling Friday after data showing the UK economy was still mired in recession stunned investors who had expected it to return to growth.

The pound shed more than 3 cents against the dollar as it fell from a six-week high after the British government said the economy contracted 0.4 percent between July and September.

The euro also gained against sterling, supported partly by data that suggested the euro zone recovery is gathering pace, but retreated slightly from a fresh 14-month high at $1.5061.

The UK data squashed hopes that the downturn there was ending and rekindled talk that the Bank of England will have to extend an emergency asset-purchasing program next month. And coming after relatively dovish remarks from Canadian and Swedish central banks this week, it cast doubt on the prospect of a synchronized recovery in developed economies.

"It was a pretty horrific report from the UK," said BNY Mellon currency strategist Michael Woolfolk. "The market had been expecting to see all the major economies recover in the third quarter, and this was a bucket of cold water for us."

The pound was last down more than 1 percent at around $1.63, far from a six-week peak near $1.67 touched earlier. The euro rose more than 1 percent to about 92 pence.

Sterling's sharp fall helped keep the dollar in positive territory against a basket of currencies. The euro was little changed at near $1.50. It hit $1.5061 earlier.

Yen Pressured, Euro Maintains Momentum

The euro has climbed more than 7 percent against the dollar this year, breaking above the psychologically significant $1.50 level this week as markets brace for the Federal Reserve to hold U.S. interest at record lows well into next year.

Late Thursday, Chicago Fed President Charles Evans said the Fed isn't worried about inflation right now but is monitoring it closely.

A survey released Friday showing that sales of previously owned U.S. houses hit a two-year high in September briefly boosted U.S. stocks, but economists say a weak labor market will continue to drag on the economy in the months ahead.

Woolfolk said some large speculative bets against the dollar had been toned down on Friday now that the $1.50 level has been breached.

But London-based Rabobank strategist Jeremy Stretch said "markets will use dips to buy (the euro) at better levels."

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The dollar rose to about 92 yen , a one-month high, as the spread between 10-year U.S. and Japanese government bond yields widened in favor of the dollar. That makes U.S. bonds more attractive to Japanese investors.

The yen also suffered after Japan's banking minister said the country needed a second extra budget worth around 10 trillion yen, feeding expectations of higher government debt.

Earlier Friday, euro zone purchasing managers indexes and the Ifo index of German business morale showed the bloc's economic recovery to be generally on track.

It was something of a mixed bag, however, with the PMIs well above forecasts but the Ifo numbers not quite as robust as analysts had expected.

Boris Schlossberg, director of research at GFT Forex in New York, said the outlook for the broader euro zone economy also depends on further strength in the euro; he said it could easily break above $1.51 if Wall street gains on Friday.

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