Dollar, euro are beneficiaries; yen gains on greenback
The British pound plunged to a 23-year low Friday against the dollar, undermined as government data confirmed the U.K. economy fell into a deep and potentially long-lasting recession in the final three months of 2008.
The Office for National Statistics said gross domestic product contracted by 1.5% in the October-through-December period compared to the previous quarter, marking the steepest quarterly drop since 1980.
That follows a 0.6% third-quarter contraction. One widely used definition of a recession is consecutive quarters of shrinking GDP.
What's more, the data showed GDP shrank 1.8% compared to the final quarter of 2007. See full story.
Economists had forecast a 1.3% quarterly decline and 1.4% annualized contraction.
"Today's figure will put further downward pressure on sterling and equity markets, as it becomes increasingly clear that the United Kingdom is set for a steep recession," said Charles Davis, economist at the Center for Economic and Business Research.
"This supports our view that the economy is set for the steepest contraction in the post-war era in 2009," Davis said. He pegged the year-on-year drop in GDP as "in the region of 3%."
In recent foreign-exchange action, the pound changed hands at $1.3577 after stumbling to its lowest level against the greenback since 1985. Sterling was trading near $1.3881 in late North American activity on Thursday.
The euro gained ground on the pound as well, rising 0.7% to 94.36 pence.
Meanwhile, London's FTSE 100 stock index dropped below 4,000 for the first time since December. See London Markets.
Ball is in Bank of England's court
The GDP figures reinforce expectations the Bank of England will continue to cut official interest rates toward zero and follow through on indications its prepared to embark on a policy of "quantitative easing" -- effectively printing money -- in an effort to stave off deflation, said Simon Derrick, currency strategist at Bank of New York Mellon.
After crashing through the bottom end of a nearly 25-year trading range versus the dollar, more downside is likely in store for the pound, he said.
Data showing a 1.6% rise in U.K. retail sales for December were largely discounted by the markets. The Office for National Statistics warned that special factors, including a cut in value-added tax and aggressive discounting, left doubts about the accuracy of the figures.
The dollar traded mostly higher, finding some follow-through support after Treasury Secretary nominee Timothy Geithner voiced the position that a "strong dollar is in America's national interest," Derrick said.
The comment was among written responses to questions from the Senate Finance Committee, according to news reports.
The words were similar to a phrase often employed by Clinton administration Treasury secretaries Robert Rubin and Larry Summers.
