The British pound hit two-year lows against a broadly stronger dollar on Monday, with stalled UK economic activity seen as another example of growing economic malaise outside the United States. The pound's latest bout of weakness acted as a catalyst to help a recently revived dollar gain against other major rivals, including the euro. But trade was thin in Europe due to a UK public holiday.
Data on Friday showed the UK economy ground to a halt in the second quarter of the year - its worst quarterly performance since 1992 - highlighting the risk of a British recession and raising the chance of a UK interest rate cut later this year.
British interest rates are currently at 5 percent compared with a Fed Funds target rate of 2 percent, with expectations that UK rate will fall seen eroding the pound's yield advantage. "The growth number confirmed our worst expectations. We've seen that the fall in house prices in the UK seem to have no end. We cannot detect this bottom in house prices that everyone seems to be looking for," said John Hydeskov, senior FX analyst at Danske bank in Copenhagen.
Hydeskov also said there was a speculative element to sterling's decline as highlighted by IMM data released late last week. He saw the pound falling further, to below $1.80. By 1033 GMT, sterling was trading down 0.2 percent on the day at $1.8482, having fallen as low as $1.8407 in the global session - its lowest since July 2006, according to Reuters data.
The dollar index, measuring the US unit's value versus a basket of six major currencies, steadied at 76.803. The pound's fall dragged the euro down 0.2 percent to $1.4763 and 0.3 percent to 162.24 yen, while the dollar eased 0.1 percent at 109.87 yen.
Added to contracting euro area growth and slowing growth in Japan, the UK growth scenario helped fuelled a view that interest rates outside the United States may be headed lower - supporting the case for an extension of the dollar's gains.
Bank of Japan Governor Masaaki Shirakawa said on Monday the nation's economic growth will likely remain sluggish due to high energy costs and slowing export growth.
"The general sentiment towards lower rates and towards the US economy managing to get out of the global crisis earlier than the other economic areas will support the dollar over the next couple of months," said Antje Praefcke, currency strategist at CBCM in Frankfurt. But while the global economic slowdown and the outlook for monetary easing outside the United States were supportive, some market participants remained sceptical about the dollar's sharp gains due to persistent worries about the US financial system.
In addition to problems at US mortgage finance companies Fannie Mae and Freddie Mac, and speculation over investment bank Lehman Brothers, traders will also be scrutinising a slew of US housing data this week - existing and new home sales and two surveys of nationwide house prices. Oil prices, which have been a key driver of the dollar's recent revival, fell on Friday in their biggest one-day slide since 2004. Prices rose on Monday, but stayed close to $115 a barrel.
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