Sterling slipped against the dollar and yen on Wednesday, retreating from a two-week high against the US currency, as worries over the health of the global economy prompted investors to shed risky positions. Sterling came under pressure against a broadly stronger dollar as stock markets in the UK and the US headed south, prompting investors to sell off high-risk assets and shift their proceeds into the US currency.
Official data confirmed Britain's economy shrank by 0.5 percent in the third quarter, the fastest pace since 1990, while household spending fell by its biggest amount in more than a decade, highlighting the UK's vulnerability to the global downturn given its heavy dependence on financial services and property-backed consumer credit.
"Sterling is suffering because there is a very negative outlook for the UK economy and the Bank of England have hinted that they are quite happy to let the currency fall," said Geraldine Concagh, economist at AIB Group Treasury in Dublin.
At 1632 GMT, the pound fell 1.5 percent to $1.5235. The UK currency came under pressure from a rise in the dollar against the euro as pessimism about the extent of the eurozone's downturn put the common currency under downward pressure. Sterling was flat against the euro at 84.40 pence.
The UK currency weakened roughly 1.5 percent to 144.89 yen as investors unwound carry trades that involve using the low-yielding Japanese currency to buy higher-yielding assets. The UK GDP figures are likely to keep expectations high for the Bank of England to deliver another round of interest rate cuts next month, after slashing them by a surprising 1.5 percentage points this month to 3.0 percent.
In other signs of the deterioration of the global economic picture, China cut benchmark lending rates by 108 basis points and the European Union outlined a stimulus package worth 200 billion euros to revive the economies of the 27-nation group.