Weak UK housing and retail sales data knocked sterling to a 12-year low on Thursday, while oil prices edged up as Tropical Storm Gustav threatened to damage U.S. oil installations in the Gulf of Mexico.
Stocks erased early losses and Wall Street was set for a steady open. The euro extended its rebound from Tuesday's six-month low against the dollar as recent hawkish comments by euro zone central bankers dampened expectations of a rate cut.
The Nationwide building society said UK house prices fell almost 2% on the month in August to post their biggest annual drop since 1991. A survey from the Confederation of British Industry showed UK retail sales fell at their sharpest annual pace in at least a quarter of a century in August.
The figures, following data showing the economy failed to expand in the second quarter, have strengthened the case for a recession and lower interest rates.
"The (UK) housing market downturn seems to be gathering pace which delivers a further blow to consumer spending as the wealth accumulation from the housing market dries up," said Adam Cole, global head of foreign exchange strategy at RBC Capital Markets.
Sterling fell to 89.7 on a trade-weighted basis, its lowest since October 1996.
Investors are pricing in a chance that the Bank of England might cut interest rates from 5% before the end of 2008.
Signs of the global economic slowdown was also evident elsewhere with Toyota Motor Corp, the world's biggest automaker, cutting its 2008 sales forecast by nearly 7%.
However, world stocks bounced higher with banks, insurers and financial services firms gaining after a recent tumble.
The MSCI main world equity index rose 0.2% while the FTSEurofirst 300 index ticked 0.1% higher. Emerging stocks dipped 0.2%.
GUSTAV THREATENS
Tropical Storm Gustav is forecast to regain hurricane status on Sunday when it moves into the southern Gulf of Mexico, home to a quarter of U.S. crude oil production and 15% of its natural gas output.
It will be the first major hurricane to threaten U.S. energy installations since hurricanes Katrina and Rina in 2005.
"Gustav…is on track to pose a sizeable threat to both upstream and downstream production capacity," Thomas Stenvoll, energy strategist at UBS, said in a research note.
"The impact of Gustav on the downstream sector could be felt more acutely."
U.S. crude rose 1.4% to $119.77 a barrel but remained well below its record peak of $147.27 hit on July 11.
Higher oil, coupled with firmer gold prices, saw the the dollar soften 0.4% against a basket of major currencies.
The euro rose 0.5% to $1.4791 after European Central Bank policymakers on Wednesday doused speculation that slowing growth and easing commodity prices would spur them to cut interest rates anytime soon.
The September Bund future rose 15 ticks while emerging sovereign spreads narrowed 4 basis points to trade at 306 bps over U.S. Treasuries.
