Sterling struck its highest level against the euro in more than 3-1/2 years on Friday due to growing worries about Spain, which encouraged investors to seek alternatives to the euro and ignore further evidence of a weak UK economy.
The pound shrugged off a bigger-than-expected deterioration in Britain's public finances and its gains against the euro pushed it to a near three-year high on a trade-weighted basis. News that Spain's Valencia region will seek government help to repay its debt knocked the euro. Worries are growing that Spain may not be able to avoid asking for a full-scale bailout as its borrowing costs trade at levels seen as unsustainable.
The euro fell to 77.72 pence, marking its lowest since the aftermath of the Lehman Brothers' collapse in October 2008. The pound has benefited from investors looking to cut exposure to peripheral euro zone assets by buying UK government bonds, considered a relative safe haven from the euro zone debt crisis, and more gains against the euro were expected. Sterling fell against the dollar, however, tracking falls in the euro against the US currency. It was last down 0.6 percent at $1.5630, pulling away from a one-month high of $1.5738 hit on Thursday.