Euro, sterling plunge on dour business activity data, UK mini-budget

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By Joice Alves and Gertrude Chavez-Dreyfuss

LONDON/NEW YORK (Reuters) - The euro and sterling plummeted to fresh 20-year and 37-year lows against a surging U.S. dollar on Friday after surveys showed the downturn in business activity across the euro zone and Britain accelerated this month and the economies were likely entering a recession.

Also weighing on sterling, Britain's new finance minister Kwasi Kwarteng announced tax cuts and household and corporate support measures and the UK debt office laid out plans for 72 billion pounds ($79.74 billion) of additional issuance for this financial year to fund the stimulus.

Sterling was set for its biggest weekly decline against the U.S. dollar in two years after it touched a fresh 37-year low of $1.1022. The pound was last down 1.9% at $1.1049.

British bond yields were set for their biggest daily rises in decades.

"The UK budget proposals do not reflect the need and the realities of the UK economy, one that likely requires corporations to pay more so that higher revenue can come in to the government," said Juan Perez, director of trading at Monex USA in Washington.

"A lot of the growth in the UK could come from further debt at a time of deep recessionary pressures and the market is reacting swiftly," he added

Earlier in the morning, UK PMI figures showed the downturn in Britain's economy worsened this month as companies battled soaring costs and faltering demand.

Moving in line with the pound, the euro dropped 0.9% to $0.9755, after earlier hitting its lowest level since October 2002 of $0.9726.

The fall was triggered in part by data showing S&P Global (NYSE:SPGI)'s flash euro zone Composite Purchasing Managers' Index (PMI), seen as a good gauge of overall economic health, fell further in September.

The downturn in German business activity deepened, as higher energy costs hit Europe's largest economy and companies saw a drop in new business.

Europe's shared currency was on track for its largest weekly percentage drop since March.

CENTRAL BANK POLICIES

The yen was 0.5% lower at 143.14 per U.S. dollar, but likely set for its first weekly gain in more than a month after Japanese authorities intervened in markets on Thursday to support the currency for the first time since 1998.

The yen rallied more than 1% on Thursday on news that Japan had bought yen to defend the battered currency. Trading was thin on Friday with Japanese markets closed for a public holiday.

The dollar index, which measures the U.S. currency against a basket of currency including euro, sterling and yen, surged to 112.44, its highest since May 2002 and topping two-decade highs hit earlier this week. It was last up 1% at 112.38 and set for its best week since March 2020.

"The buck is indeed a safe haven unlike any other time in recent decades because the war and its effects are not affecting the U.S.'s domestic goals," said Monex's Perez.

The Bank of England lifted interest rates by 50 basis points on Thursday in an attempt to tackle inflation but, like previous rate hikes in recent months, the move failed to support the pound as it was overshadowed by concerns about the economy.

The dollar received a boost this week from a very hawkish Federal Reserve policy announcement and rising Treasury yields.

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Currency bid prices at 10:10AM (1410 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 112.4000 111.2200 +1.08% 17.496% +112.5100 +111.0700

Euro/Dollar $0.9737 $0.9834 -0.99% -14.36% +$0.9851 +$0.9726

Dollar/Yen 143.0900 142.4000 +0.48% +24.29% +143.2800 +141.7700

Euro/Yen 139.32 140.00 -0.49% +6.91% +140.2500 +138.9100

Dollar/Swiss 0.9775 0.9769 +0.07% +7.18% +0.9831 +0.9757

Sterling/Dollar $1.1016 $1.1259 -2.13% -18.52% +$1.1273 +$1.0995

Dollar/Canadian 1.3554 1.3488 +0.50% +7.21% +1.3577 +1.3470

Aussie/Dollar $0.6565 $0.6642 -1.14% -9.67% +$0.6656 +$0.6556

Euro/Swiss 0.9517 0.9608 -0.95% -8.22% +0.9622 +0.9499

Euro/Sterling 0.8836 0.8734 +1.17% +5.19% +0.8850 +0.8712

NZ $0.5788 $0.5846 -0.98% -15.42% +$0.5856 +$0.5772

Dollar/Dollar

Dollar/Norway 10.5550 10.3915 +1.50% +19.73% +10.5735 +10.4155

Euro/Norway 10.2763 10.2331 +0.42% +2.63% +10.2888 +10.2080

Dollar/Sweden 11.2283 11.0650 +0.52% +24.51% +11.2452 +11.0552

Euro/Sweden 10.9325 10.8763 +0.52% +6.78% +10.9552 +10.8896

(Reporting Joice Alves in London and Gertrude Chavez-Dreyfuss in New York; Additional reporting by Rae Wee; Editing by Susan Fenton and Jonathan Oatis)