Dollar gains against weak pound

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GDP shrinks in UK

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NEW YORK (CNNMoney.com) -- The dollar rose against the pound Tuesday after a report showed the U.K. economy marching toward recession.

The dollar jumped against the British pound, which sank 1.2 cents to $1.47, but fell slightly against the 15-nation euro, which rose 0.11 cents to $1.396. The dollar also gained ¥0.54 to ¥90.77 against the Japanese yen.

The U.K. government reported that the country's gross domestic product, the sum of all U.K.-produced goods and services, contracted by 0.6% in the third quarter, revised down from 0.5%. Last quarter, the government reported zero growth.

A recession is loosely defined as two consecutive quarters of negative economic growth. "[The U.K.'s fourth quarter] could also be disappointing," said Gareth Sylvester, senior currency strategist with HiFX.

Investors are watching and waiting to see what the Bank of England will do to combat the "unprecedented" economic downturn, according to Sylvester.

One possibility: The U.K. central bank could follow the Federal Reserve in cutting its key interest rate to near zero to keep cash flowing through the economy.

"You don't want to get caught holding [pound] sterling," Sylvester said.

The GDP of the United States also declined in the third quarter. As economists had expected, according to a Briefing.com poll, the GDP contracted 0.5%.

Concerns about the world's economic outlook has spurred buying of U.S. Treasurys, which are backed by the U.S. government and considered an ultra-safe investment during times of economic trouble.

Since Treasurys are sold in dollars, investors must first purchase dollars in order to buy Treasurys.

During Tuesday trading, the prices of short-term 1-, 3-, and 6-month Treasurys, usually considered among the most defensive investments, have risen.

That trend has been consistent, Sylvester said.