LONDON: Sterling rose from a one-week low on Thursday as the dollar slumped towards a session low, although renewed concerns over the state of play in Brexit negotiations checked the British currency's gains.

Despite sterling's weakness this week, it is still up nearly 3 percent against the dollar this year as investors have ramped up bets that the Bank of England may raise interest rates more than previously forecast.

Morgan Stanley strategists said long positions in sterling were the largest on its G10 currency position monitor as market expectations for a rate hike as early as May grew.

"Sterling strength is as much a function of the dollar rally rather than any fundamental factors supporting the British currency, with Brexit concerns also playing its part," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

The dollar slipped against a basket of major currencies as its rally from a three-year low last week ran out of steam, and the yen soared as heightened volatility led investors to favour the Japanese currency.

The dollar index, which measures the greenback against a basket of six major currencies, was down 0.22 percent at 89.805. Through Wednesday, the index gained nearly 2 percent since hitting a three-year low of 88.253 on Friday.

The currency has also come under pressure as debate on the UK's Brexit strategy intensified before a meeting of EU leaders on March 22-23, when the bloc's leaders may or may not agree to a transition period following Britain's scheduled departure from the EU in March 2019.

On Thursday, the European Union said it would not agree to a post-Brexit deal in which Britain would stick to the bloc's rules in some areas, diverge moderately in others and go for distinctively different solutions for the rest.

However, a shift in market expectations of the BOE's policy stance has offered some support to the pound in recent sessions.

In an annual report to parliament on Wednesday, Bank of England's chief economist Andy Haldane said the risks to the BoE's latest projections, for both UK demand and inflation, were to the upside.

He said both the global economy and Britain could well do better than the BoE's most recent forecasts.

Most economists now expect the BoE to raise rates to 0.75 percent in May, and financial markets see a roughly 70 percent chance of a further rise this year, taking rates to 1 percent.

Sterling rose 0.2 percent to $1.3940 on Thursday, rising from an intraday low of $1.3858 and nearing a post-Brexit vote high of above $1.43 hit in late January.

It is up nearly half a percent from the day's lows.

Against the euro, the pound was broadly steady around 88.36 pence and was stuck in well-worn trading ranges.