Sterling down at end of tough week vs dollar

By Patrick Graham and David Milliken

LONDON, March 21 (Reuters) - Sterling ended the week on a softer note on Friday, still suffering from the shock of Wednesday's U.S. Federal Reserve meeting which has wrought a change in some investors' attitude to the dollar.

The pound, already struggling to extend a bullish eight-month run, has shed more than 1 percent against the greenback this week, most of it following Fed chair Janet Yellen's hint that U.S. interest rates could rise early next year.

It has been broadly flat against the euro over the past seven days, however, and analysts seem divided over whether this week's action is really enough to push the pound out of a broader range it has held since mid-February.

"It certainly looks heavy," said a senior dealer with one bank in London.

"What flows we have seen look to be a bit of an unwinding of the positive move we had seen. It has dipped in the last hour or so again and I think that negative tone may be significant for the next week."

Sterling fell 0.1 percent against the dollar and took little support from UK public sector borrowing data which showed the government's efforts to curb the deficit progressing. Against the euro it was just 0.1 percent lower at 83.55 pence.

British government bond prices edged up, meanwhile, in line with German debt, after hitting their lowest level in more than a week on Thursday after Yellen's comments raised the prospect of higher U.S. interest rates.

Twenty- and 30-year gilts showed the biggest gains, with yields falling 2 basis points to 3.40 and 3.53 percent respectively, as they recovered a fraction of the previous two days' sharp underperformance versus shorter-dated debt.

Changes to British pension rules in finance minister George Osborne's annual budget on Wednesday had caused longer-dated debt to heavily underperform as people who retire would have more options about where to invest their savings.

Ten-year gilt yields were 1 basis point lower at 2.76 percent at 1525 GMT, while their spread over 10-year Bunds was little changed at around 112 basis points.

TECHNICAL SUPPORT

The main element still in sterling's favour is Britain's improving economy, which may prompt the Bank of England to raise interest rates for the first time well before its counterpart in the euro zone. None of that has changed, although many analysts say all the good news may now be priced in.

Technical analysts at Swedish bank SEB (Paris: FR0000121709 - news) said sterling looked ripe for at least a pause in losses against the dollar.

"We've now basically fallen down to the channel floor and even if a downside exit is increasingly likely there should at least be a minor correction bounce before making a real attempt lower," they said in a morning research note.

"We see a possible bounce to 1.6560/70. Falling below 1.6494 and the downside test is already in the making."

The pound traded at $1.6490 by 1540 GMT. (Editing by Gareth Jones)