Euro and pound dip against dollar

The dollar has benefited from gloomy times in Europe

The dollar has rallied against the pound and euro amid belief that the US economy may be in better health than other countries.

Sterling slumped to 17 month lows of $1.9225, down 1.1%, while the euro hit five month lows of $1.5195.

The European Central Bank's decision to leave rates on hold was the main driver of the fall, traders said.

Adding to the woes were comments from the bank's chief that economic conditions in eurozone were worsening.

"We consider that there is some materialisation of the risks that we have identified," ECB chief Jean Claude Trichet said after Thursday's decision to keep rates at 4.25%.

Recession fears

"Most of the fall in euro/dollar came from the extremely dovish comments from Trichet, in combination with gloomy data from the euro zone ... but growth is definitely a problem everywhere," said John Hydeskov, senior Foreign Exchange analyst at Danske Markets.

While the US is continuing to suffer from the credit crunch - with consumer confidence falling, unemployment rising and ongoing problems in the housing market - its economy is showing small signs of growth.

That is in stark contrast to several European countries which are either in recession or on the verge of it.

On Friday Italy became the latest nation in the 15-member bloc to announce its economy had contracted in the second quarter of the year - raising fears of a looming recesssion.