Sterling eyes 2008 highs vs euro after dollar jump

By Patrick Graham

LONDON, Sept 25 (Reuters) - Sterling hit its highest levels in two years against the euro on Thursday, making the single currency briefly worth less than 78 pence for the first time since July 2012.

Along with a raft of other major currencies, the pound was lower against the dollar, but the contrasting outlooks for monetary policy in the euro zone and United Kingdom have taken sterling to within a whisker of highs not seen against the euro since the 2008 financial crisis.

By 0900 GMT the euro had gained a foothold to be worth 78.04 pence, having hit a low of 77.90 pence in early trade .

With market attention swinging back to the likelihood of a rise in UK interest rates at some point in the next six months - after two weeks of tensions around Scotland's independence referendum - analysts say the euro may continue to fall.

"Euro-dollar is trading very heavily this morning and that seems to be the driver for sterling," said Phyllis Papadavid, senior global FX strategist at BNP Paribas (Xetra: 887771 - news) in London.

"Notwithstanding some mixed messages from U.S. Federal Reserve policymakers, the economic fundamentals continue to point to dollar strength and a focus on the divergence in policy outlooks that will weaken the euro."

Until mid-July, the pound had been one of the best performers among leading currencies, surging 15 percent against the dollar in a year on the back of expectations the Bank of England would raise interest rates earlier than its peers.

Those expectations have been pushed back somewhat, but there are still major investment houses predicting the bank will raise rates in November.

An afternoon speech by Mark Carney in Newport (NasdaqGS: NEWP - news) , Wales will be watched closely by investors. Any renewed signal that rates will rise next year would underline the contrast with pressure for more policy easing in the euro zone.

Many players, however, are cautious about making huge bets, given the uncertainty over constitutional changes that last week's Scottish vote has triggered.

As Britain's national elections approach next May, a debate on devolving more powers to Scotland in combination with a reform under which only English MPs would vote on English issues is set to take centre stage.

That underlines a less certain political outlook which may also include a referendum on whether to remain in the European Union during the next parliament, a fearful scenario for financial markets. (Editing by Toby Chopra)