The euro hit a four-month peak against the dollar Thursday on the back of positive eurozone data, while the British pound fell after ratings agency S&P lowered its outlook for the country's economy.
In London morning trade, the European single currency rallied as high as 1.3839 dollars -- last seen on January 5. It later stood at 1.3789, up from 1.3781 late in New York on Wednesday.
Business activity in the 16 countries using the euro hit an eight-month high in May, a survey showed on Thursday, giving a boost to the euro and hopes that the worst of the slump may be easing.
The eurozone's purchasing managers' index (PMI), compiled by data and research group Markit, rose to 43.9 points in May from 41.1 points in April, according to a first estimate.
The latest figures, although an improvement, remain below the boom-bust line of 50 points for a 12th consecutive month in the recession-hit eurozone.
"Eurozone PMI sustained its uptrend and posted another increase in May," said Isabelle Job, Head of Macro Research at Calyon, the investment banking arm of French bank Credit Agricole.
"This new release provides further evidence that the real economy has turned a corner, though the timing and the speed of the recovery still remains uncertain."
Elsewhere, the British pound fell sharply as international ratings agency Standard and Poor's downgraded its outlook on Britain's economy to "negative" from "stable" owing to the country's "deteriorating public finances."
The change may eventually lead to S&P downgrading Britain's top-level sovereign credit ratings, the agency warned in a statement.
"Sterling has suffered a knee-jerk reaction as S&P's decision to revise their outlook on the UK economy saw the pound give back some of its recent gains," said ETX Capital analyst Manoj Ladwa.
"While the UK maintains its longer-term triple-A rating, traders are questioning whether the euro or dollar may be a safer bet in the near-term."
Traders also sold the greenback after the US Federal Reserve revised its forecasts on Wednesday to show a drop in US economic output of between 1.3-2.0 percent in 2009.
Fed policymakers saw "tentative evidence" the US economy is emerging from recession and think it could show modest growth in the second half of 2009, according to minutes from their April 28-29 meeting.
But they also said the Fed would buy more securities to ease a credit squeeze, sending long-term interest rates and stock prices lower.
"The dollar has been under pressure since the release of the minutes signalling a willingness to extend the size of its quantitative easing," added Job at Calyon.
"The better-than-expected (eurozone) PMIs will not help to reverse this downward trend."
In London trade on Thursday, the euro stood at 1.3789 dollars against 1.3781 dollars late on Wednesday, at 130.32 yen (130.74), 0.8853 pounds (0.8748) and 1.5149 Swiss francs (1.5158).
The dollar stood at 94.57 yen (94.87) and 1.0994 Swiss francs (1.1002).
The pound was at 1.5567 dollars (1.5748).
On the London Bullion Market, the price of gold rose to 940.89 dollars an ounce from 939.50 dollars late on Wednesday.
