Recession fears weaken sterling

Investors are favouring the dollar over the pound

The pound has hit its weakest levels against the dollar in more than two years, extending recent losses on fears about the health of the UK economy.

Sterling dropped as low as $1.8405 - its weakest since July 2006 - before recovering to $1.8542 by mid-afternoon in Europe.

Sterling has fallen sharply this month. As recently as mid-July, one pound bought two dollars.

The pound's losses gathered pace on Friday due to fresh recession fears.

"The growth number confirmed our worst expectations," said John Hydeskov, senior foreign exchange analyst at Danske bank in Copenhagen.

"We've seen that the fall in house prices in the UK seems to have no end. We cannot detect this bottom in house prices that everyone seems to be looking for," he added.

The euro also fell against the dollar, trading at $1.4708 but above a six-month low of $1.4630 hit last week.

Deteriorating outlook

The US currency has benefited as the economic outlook has darkened in the UK and Europe.

Investment guru Warren Buffett said on Friday that he had no bets against the dollar - underscoring the currency's strength.

The fall in sterling could help UK exporters whose goods will be cheaper overseas.

But it will hurt holidaymakers who have benefited from a strong pound when travelling to countries which use the dollar.