Sterling slipped to a one-week low against the dollar on Thursday, with investors shrugging off a reasonably strong manufacturing survey for Britain and instead focusing on prospects for more hikes in US interest rates.
The Federal Reserve is widely expected to raise rates to 4.75 percent from 4.50 next Tuesday and upbeat comments on the US economy from Fed chairman Ben Bernanke this week have boosted expectations of more tightening after that, helping the dollar strengthen across most major currencies.
"We've had a general bounce back on the dollar as markets re-evaluate the outlook for US interest rates, and that's probably weighing on sterling," said Geraldine Concagh, economist at AIB Group Treasury in Dublin.
In contrast to the Fed - and to the European Central Bank - the Bank of England is not expected to raise rates from the current 4.50 percent this year. But expectations for a UK rate cut have also faded in recent weeks thanks to reasonably strong data and an "on-hold" tone taken by policymakers.
British factory orders fell at their slowest pace in a year in March, while manufacturers' expectations for output were at their most upbeat in over 12 months, the Confederation of British Industry survey showed on Thursday.
But sterling was still down around 0.3 percent against the dollar at a one-week low of $1.7406.
The dollar was further boosted late in the European session by stronger than expected US existing home sales in February. Sterling was broadly steady versus the euro at 69.11 pence, but within sight of a seven-month low of 69.50 pence last week.
"I get the impression that the market may just be gunning for sterling a little bit, feeling its weak point," said Steve Barrow, currency strategist at Bear Stearns.
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