Grim PMIs knock euro, sterling to new lows as recession looms

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

Sterling also fell almost 1% against the U.S. dollar to touch a fresh 37-year low of $1.11520 after PMI figures showed the downturn in Britain's economy worsened this month as companies battled soaring costs and faltering demand.

The pound was down 0.6% at $1.1191 at 0900 GMT.

George Vessey, currency strategist at , said the euro zone data highlighted "ongoing fears about the energy crisis and recession", pushing the euro to new 20-year lows.

Also weighing on sterling, Britain's new finance minister announced plans to spend about 60 billion pounds ($67 billion) on subsidising gas and electricity bills for the next six months for households and businesses.

The Bank of England lifted interest rates by 50 basis points on Thursday 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 yen was slightly lower but still set for its first weekly gain in more than a month after Japanese authorities intervened in markets to support the yen for the first time since 1998.

The yen edged down 0.3% to 142.88 per dollar, after a more than 1% rally 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 0.75% to 112.060, hitting a fresh May 2002 high. The dollar received a boost this week from a very hawkish policy announcement and rising yields.

"Ironically, I do think that the rise in U.S. Treasury yields overnight, particularly the 10-year area, is a direct result of the view that the is going to have to be selling Treasuries, to supply the dollars in order to intervene," said Ray Attrill, head of FX strategy at National Australia Bank. "Outside of dollar/yen, it will make the dollar even more attractive against other currencies."

Flash September purchasing managers' indexes for the United States were due later on Friday and will provide a good overview of the global outlook.