Sterling recovers against dollar after US payroll data

( AFP ) - The pound managed a small comeback against the US dollar on Friday after a raft of economic data helped the beleaguered British currency.

The dollar was back under heavy selling pressure after disappointing US job data fuelled fears about an imminent recession in the world's largest economy.

The data from the Labor Department showed that only 18,000 new jobs were created in December, well below the 70,000 rise expected by analysts.

Further bad news emerged with the news that the unemployment rate, taken from a separate survey of households, jumped to 5.0 percent in December -- the highest rate since November 2005 and higher than the 4.8 percent expected by economists.

The markets interpreted the data as increasing the likelihood that the Federal Reserve will continue to cut interest rates aggressively this year in order to avoid a recession.

Sterling meanwhile got a fillip from a surprise rise in the monthly purchasing managers index from the Chartered Institute of Purchasing and Supply for the services sector.

The index rose to 52.4 in December from 51.9 in November, slightly diminishing the prospect that the Bank of England will trim interest rates for a second consequetive month in order to boost the lagging economy.

Mortgage lending also rose by a higher-than-anticipated 7.8 bilion pounds in November, up on October's upwardly revised 7.7 billion.

Mounting evidence of slow retail sales over the crucial Christmas sales season coupled with a dismal showing in the manufacturing sector continue to drive expectations of further monetary easing from the BoE.

Steve Pearson at HBOS pointed out that the forex market is being driven by interest rate differentials rather than by anything else.

"The currencies of the central banks which are cutting interest rates are likely to remain under pressure for now," Pearson told Thomson Financial News.

For now at least some of the angst about the year end effect of tight credit conditions appear to have been pushed to the background.

Pearson at HBOS said that with money-market liquidity issues subsiding due to a combination of the turn of the year, attention has shifted to the extent of the economic damage already done.

"This is important as shifts in short-term interest rate differentials seem to be the main forex driver at present," he said.

Sterling London 1635 GMT London 1245 GMT

Euro 1.3369 down from 1.3423

US dollar 1.9758 up from 1.9736

Japanese yen 214.08 down from 216.00

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