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Sterling hurt by stronger dollar, still near recent highs

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A bank employee counts pound notes at Kasikornbank in Bangkok
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By Elizabeth Howcroft

LONDON(Reuters) -The pound fell after higher-than-expected U.S. inflation data prompted the dollar to strengthen on Wednesday, although sterling held up better than other risk currencies and was still hovering around the $1.41 level.

Sterling rose above $1.41 for the first time since February on Monday, due to a combination of dollar weakness, market relief over Scottish election results, lockdown easing measures, and the Bank of England raising its forecast for economic growth.

It had largely held on to these gains this week until it dropped after U.S. data showed that consumer prices increased by the most in nearly 12 years in April, news which pushed the dollar higher as investors turned more cautious.

At 1539 GMT, the pound was down 0.3% at $1.40940, having reached as high as $1.4167 on Tuesday, and was at $1.4142 at 1122 GMT on Wednesday.

The Australian dollar - seen as a liquid proxy for risk appetite - was down by 1.3%.

Versus the euro, the pound was up 0.2% at 85.68 pence per euro, having hit a new one-month high.

ECONOMIC RECOVERY

UK GDP data for March beat market expectations, keeping investors optimistic about the country's economic recovery from the pandemic.

Although analysts said the data's immediate market impact was limited by the fact that it referred to a period when stricter lockdown restrictions were still in place, it helped support the market expectation for a strong recovery in the UK.

"The data today is consistent with a positive outlook for the pound," MUFG head of research Derek Halpenny said in a note to clients.

"GBP has underperformed in Q2 to-date, being the 2nd worst performing G10 currency. We see scope for catch-up with the markets concluding the BoE outlook is too pessimistic leading to sooner taper speculation and the prospect of short-term rates drifting further higher, helping support GBP."

The Bank of England slowed the pace of its trillion dollar bond-buying programme on Thursday, but stressed it was not reversing its stimulus.

Separate trade figures on Wednesday showed Britain imported more goods from non-EU countries than EU countries during the first quarter for the first time since records began in 1997.

(Reporting by Elizabeth Howcroft; Editing by Giles Elgood)

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