Sterling dips against dollar as construction activity slows

By Jemima Kelly

LONDON, Dec 2 (Reuters) - Sterling fell back towards a 15-month trough against the dollar on Tuesday after a survey of the construction sector added to doubts about the strength of Britain's recovery and when interest rates will start to rise.

The monthly purchasing managers' index (PMI) for the sector dropped to 59.4 in November, short of economists' expectations of 61.0, though still well above the 50 level that separates growth from contraction.

Data released from the United States, meanwhile, pointed to a economy that is picking up speed, with small business borrowing rising to its highest on record and construction spending posting its biggest gain in five months.

Sterling fell to $1.5639 on Tuesday afternoon, close to Monday's low of $1.5585 - the pound's weakest since early September last year. It was last trading at $1.5653, down 0.5 percent on the day.

The euro, itself struggling close to a two-year low against the dollar, was flat against the pound at 79.25 pence .

"My gut feeling is that sterling will break lower, because I believe the Fed will stick to its (tightening) schedule...and because the UK economy is heading in the wrong direction for monetary policy tightening," said Neil Mellor, a currency strategist at Bank of New York Mellon.

The PMI (Other OTC: PMIR - news) for the services sector due on Wednesday morning will be closely watched. The services industry makes up almost 80 percent of the UK economy and its health is therefore an important consideration for the Bank of England when deciding when to raise interest rates.

UK rate forecasts have been pushed back dramatically over the past few months, with some now not expecting a hike until 2016. That pushback of expectations has weighed on the pound, helping send it down almost 9 percent since it hit a six-year high near $1.72 in July when many expected a hike this year.

Also eyed on Wednesday will be finance minister George Osborne's half-yearly budget update, in which he will try to convince voters that his plan for more spending cuts is more credible than Labour's less aggressive austerity proposals.

"All eyes will be on the projections for the likes of GDP inflation and most notably the country's debt," wrote Alpari analyst James Hughes in a note. (Editing by Ralph Boulton)