Sterling hit by shrinking UK economy Sterling fell against the dollar and euro on Friday after data showed the UK economy shrank more severely than expected in the fourth quarter. The Office for National Statistics said gross domestic product fell 0.3 per cent in the final three months of 2012, worse than the 0.1 per cent dip expected by the market. The number was particularly disappointing as it indicated the robust 0.9 per cent growth seen in the third quarter was entirely due to the boost given by the London Olympics. Investors were also concerned that disruptions caused in the UK during January will have a negative impact in the first quarter, spelling a second consecutive quarter of contraction - a technical recession. However, some analysts saw beyond the gloom. James Knightley at ING said: "Seasonal adjustment problems, working day effects, the Olympic effect and underlying poor data quality make this an incredibly volatile report." He added that recent easing in the pound on foreign exchanges should increase British competitiveness, while the Bank of England's funding for lending scheme was improving credit conditions and employment remained fairly robust. If these trends can all remain in place there is the platform for the UK economy to start performing more strongly. The pound fell 0.2 per cent against the dollar following the data, to $1.5759. Prior to the numbers it had been 0.1 per cent higher. The pound was 0.4 per cent higher at Y143.22 against a notably weaker yen. The euro climbed 0.6 per cent to £0.8517 against sterling and remained higher against a weaker dollar and yen after Germany's monthly Ifo survey of business confidence was better than expected. Ifo's main index rose to 104.2 in January from 102.4 in December, while the expectations component of the index rose from 98 to 100.5, beating expectations of 98 as German exporters were more optimistic, and did not fear the euro being drawn into a currency war. Ifo economist Klaus Wohlrabe said German companies were "starting to feel the impact of the eurozone debt crisis easing, and optimism was rising." The euro climbed 0.5 per cent to $1.3434 against the dollar and was up 1 per cent to Y122.02 versus the yen.