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Dlr comeback fed by sinking pound on GDP surprise

Oil lost traction after surging nearly 5 percent on Thursday. It was last at $120.53 a barrel, down 0.65 percent on the day, taking the heat out of upside inflation risks and aiding the dollar.

Sterling fell more than one percent versus the dollar after second quarter gross domestic product (GDP) showed the UK economy ground to a halt in the three months to June, down from a preliminary estimate of 0.2 percent growth and undershooting analysts' forecasts for a revision to 0.1 percent growth.

That was the weakest performance since the recession of the early 1990s.

The poor UK growth numbers add to an overall bleak picture of a slowing European economy after recent data showing contraction in euro zone GDP, increasing the possibility of European Central Bank and Bank of England monetary easing.

‘We had a bit of a correction of yesterday's dollar decline before the UK GDP data. The UK figures, as well as hitting the pound, also pressured the euro as that was a sign that growth in Europe is slowing down,’ said Marcus Hettinger, global FX strategist at Credit Suisse.

By 1102 GMT, the euro had fallen half a percent to $1.4828, edging towards a six-month low hit earlier this week at $1.4628 according to Reuters data.

Sterling slid 1.1 percent to $1.8589, while trade-weighted sterling hit its lowest since late 1996.

The pound's losses helped fuel a 0.6 percent rise in the dollar versus a basket of major trading currencies to 76.479, moving it closer to 77.413 hit on Tuesday, its strongest since late December.

The dollar also rose 0.8 percent to 109.26 yen, recovering from a slide to 108.12 yen on Thursday and inching back towards an eight-month high of 110.66 yen touched a week ago.

Further dollar gains favoured

Markets awaited a speech by US Federal Reserve Chairman Ben Bernanke, who will talk about financial stability at an annual symposium in Jackson Hole, Wyoming, later in the day, for more clues into the US central bank's view on the economy and its interest rate outlook.

Persistent doubts about the health of Fannie Mae, Freddie Mac and investment bank Lehman Brothers have reminded investors about the housing-related troubles still plaguing the United States.

But those financial sector fears were not having the same repercussions in financial markets as they did earlier in the year, traders said.

The dollar has soared this month as investors dumped positions they had made betting the global economy would withstand the US downturn and the credit crisis by selling the euro, the Australian dollar and commodities.

Clear signs that the euro zone and other major economies are losing steam have prompted investors to expect some central banks will start to cut interest rates to shore up growth, just as the Federal Reserve is expected to keep rates steady for a while.

Analysts said the dollar had been overdue for a reversal of its sharp gains, but it was still on the road to a medium-term recovery after a seven-year slide to record lows.

‘We're still upbeat on the dollar, and we think that the big move we saw last week is very symptomatic of the currency being undervalued in the bigger picture,’ said Paul Mackel, director of currency strategy at HSBC Markets.