LONDON: Sterling edged back towards a five-week high versus the dollar on Friday as the Federal Reserve's pledge to keep US rates low left the dollar struggling, while the pound also inched higher versus a fragile euro.
Traders said an absence of UK data meant sterling direction would be dominated by the euro and the dollar, but concerns over the health of the UK economy kept investors wary of buying the pound.
Sterling rose 0.1 percent on the day to $1.5700, moving back towards a five-week high of $1.5735 hit on Thursday. The dollar remained close to a six-week low versus a currency basket, but market participants said its losses could be temporary in nature.
"Our view is still that this period of dollar weakness we've seen this year will prove temporary so we're not looking for cable to break above back into the $1.60s," said Lee Hardman, currency strategist at BTM-UFJ.
"Maybe the market is getting ahead of itself in terms of anticipating QE3, that does create some scope for disappointment which could help the dollar regain some lost ground in the coming month," he added.
The Fed's pledge this week to keep US rates on hold through the end of 2014 sparked some speculation a third round of quantitative easing may be required to stimulate the US economy, which would weigh on the dollar.
For sterling, traders said a break of $1.5735 would expose the December 21 high of $1.5775. They also said there was good demand to pick up the pound on dips.
"We feel there is some value in long GBP but not at these levels," said a London-based sales trader.
"Our traders note small stops through to $1.5610 and feel this affords better levels to buy."
Sterling held its ground against the euro, trading close to flat for the day at 83.41 pence after slipping to four-week lows of 83.99 on Thursday. Resistance was at 84.22 pence, the late December high.
The euro was broadly steady, supported on hopes for a Greek debt swap deal which is needed to avert a messy default, but hampered by increasing concerns that Portugal may be heading towards a second bailout and possible debt writedowns.
Sterling has been unable to take full advantage of euro zone troubles due to expectations the Bank of England will need to increase its asset purchase programme as early as next month to support Britain's flagging economy.
Those concerns were heightened after data on Wednesday showed the UK economy contracted by 0.2 percent in the fourth quarter of 2011, putting it on the brink of recession.
A Confederation of British Industry survey on Thursday showed British retail sales suffered their biggest annual fall in January since March 2009, when Britain was last in recession.
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