Dollar rallies against the pound
Shrinking British economy raises questions about the global recovery and pressures the U.K. currency.
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NEW YORK (Reuters) -- The dollar and euro soared against sterling Friday after data showing the U.K. 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% 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 around $1.5060.
The U.K. data quashed 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.
"It was a pretty horrific report from the U.K.," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. "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 1.9% at $1.6305 , far from a six-week peak near $1.67 touched earlier. The euro rose 1.8% to 92.06 pence.
Sterling's sharp fall helped keep the dollar in positive territory against a basket of currencies.
The euro was down 0.1% at $1.5012.
The euro has climbed more than 7% 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.
The dollar rose 0.7% to ¥92.07 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.
Nick Bennenbroek, head of currency strategy at Wells Fargo in New York, said the euro's failure to push higher is an indication that "short-term positioning is already very extended." 
