Euro, sterling plunge on soft business activity data, UK budget woes

The euro and sterling plummeted to fresh 20-year and 37-year lows against a surging US 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 posted its biggest weekly decline against the US dollar in two years after it touched a fresh 37-year low of $1.0840. The pound was the day's biggest loser against the dollar, down 3.4% at $1.0874, and also had its largest daily percentage loss in two years.

British bond yields also surged on Wednesday as prices sank. Benchmark UK 10-year yields soared to 3.829%, a level not seen since April 2011.

"The market is giving very strong signals that it is no longer willing to fund the UK's external deficit position at the current configuration of UK real yields and exchange rate," wrote George Saravelos, global head of FX research at Deutsche Bank in a research note.

"The policy response required to what is going on is clear: a large, inter-meeting rate hike from the Bank of England as soon as next week to regain credibility with the market. And, a strong signal that it is willing to do 'whatever it takes' to bring inflation down quickly and real yield into positive territory," he added.

Earlier in the session, 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 1.5% to $0.9689, after earlier hitting its lowest level since October 2002 of $0.9669.

The fall was triggered in part by data showing S&P Global'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 had its worst weekly performance since March 2020.

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The yen was 0.6% lower at 143.30 per US dollar, but had its first weekly gain of 0.3% 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 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 US currency against a basket of currency including euro, sterling and yen, surged to 113.23, its highest since May 2002 and topping two-decade highs hit earlier this week. It was last up 1.6% at 112.96, posting its best largest weekly percentage rise 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 US domestic goals," said Juan Perez, director of trading at Monex USA in Washington.

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.