Faltering sterling hits 2-yr low vs resurgent dollar

By Veronica Brown

LONDON (Reuters) - A hobbled pound hit 2-year lows versus the dollar on Monday, with stalled UK economic growth seen as another example of growing economic malaise outside the United States.

Growth data released on Friday showed the UK economy had ground to a halt in the second quarter of the year -- its worst quarterly performance since the second quarter of 1992 -- highlighting the growing risk of a British recession and raising the chance of a UK interest rate cut later this year.

British interest rates currently stand at 5 percent compared with a Fed Funds target rate of 2 percent, with prospects for UK rates to fall seen eroding the pound's yield advantage.

The pound's latest bout of weakness helped support the dollar against other currencies too, such as the euro.

"The growth number confirmed our worst expectations. We've seen that the fall in house prices in the UK seem to have no end. We cannot detect this bottom in house prices that everyone seems to be looking for," said John Hydeskov, senior FX analyst at Danske bank in Copenhagen.

Hydeskov also said there was a speculative element to sterling's decline as highlighted by IMM data released late last week and saw the pound falling further to go below the $1.80 mark.

Data from the Commodity Futures Trading Commission on Friday showed currency speculators increased their bets on the U.S. dollar for a fourth week, but the short position on sterling spiked.

By 0727 GMT, sterling was trading down 0.35 percent on the day at $1.8456, having earlier fallen as low as $1.8407 -- its lowest since July 2006, according to Reuters data.

The dollar index, measuring the U.S. unit's value versus a basket of six major currencies, was up on the day at 76.908

.DXY.

The pound's fall dragged the euro down 0.3 percent to $1.4745 and 0.5 percent to 162.03 yen, while the dollar eased 0.1 percent at 109.87 yen.

Trading was thin in Europe however with British markets closed for a public holiday.

DOLLAR WELL-POSITIONED

Added to contracting euro area growth and slowing growth in Japan, the UK growth scenario fuelled a view that interest rates outside of the U.S. may be headed lower -- supporting a case for the dollar to rise further.

While the global economic slowdown and the outlook for monetary easing outside the United States were supportive, some market participants remained skeptical about the dollar's sharp gains due to persistent worries about the U.S. financial system.

In addition to problems at U.S. mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), and speculation over investment bank Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz), traders will also be watching a slew of U.S. housing data due this week -- existing and new home sales and two surveys of nationwide house prices.

"While the commodity markets are still volatile, they are no longer going through a one-way decline. Dollar buying momentum seems to be slowing under such conditions," Masafumi Yamamoto, head of forex strategy for Japan at Royal Bank of Scotland, in a note.

Oil prices, which have been a key driver in the dollar's recent revival, fell on Friday in the biggest one-day slide since 2004 on weakening global demand and rising supply, with the dollar's rebound reinforcing its sell-off. Prices clawed up on Monday, but stayed close to $115 a barrel.

Comments by influential investor Warren Buffett that he has no bets against the dollar also added to the dollar's upward momentum.

(Additional reporting by Chikako Mogi in Tokyo)

(Editing by Chris Pizzey)