Sterling drops to 5-wk low vs dollar after Fed's surprise shift

* Pound drops as rate differentials move in dollar's favour

* UK wage and jobs growth data lends sterling support

* Euro/sterling retreats from recent 3-month highs

By Anirban Nag

LONDON, March 20 (Reuters) - Sterling fell to a five-week low against the dollar on Thursday, as interest rate differentials moved in favour of the greenback after the Federal Reserve surprised markets and said that a U.S. rate hike was not very far away.

The gap (NYSE: GPS - news) between the rate-sensitive two-year British gilt yields and U.S. Treasuries narrowed amid some talk that the Fed might just pip the Bank of England to being the first major central bank to tighten policy in a year's time.

The pound was down 0.3 percent against an overall buoyant dollar at $1.6496, having hit $1.6486, its lowest since Feb. 12, and tripping stop-loss sell orders below $1.6500.

It had started to fall against the dollar on Wednesday after Federal Reserve head Janet Yellen said the central bank will probably end its massive bond-buying program this autumn, and could start raising interest rates around six months later.

That would bring it in line with the Bank of England which is also expected to tighten policy in the spring of 2015.

"If the market starts to price in the U.S. pulling the rate hike trigger faster than the UK then this could weigh on sterling/dollar," said Kathleen Brooks, research director at FOREX.com.

Still, sterling found some support and outperformed the euro. That support was primarily due to more signs of improvement in the UK jobs market and a pick-up in wages.

Mark Mccormick, a currency strategist at Credit Agricole (TLO: ACA.TI - news) said the pound's losses against the dollar, post the Fed, were relatively smaller than the other actively traded major currencies like the yen and the euro. And that was mainly because of strong British data.

"The main takeaway from (yesterday's) labour data was the better-than-expected jump in earnings. In January wages rose 1.4 percent from 1.2 percent in December, which, if sustained, could impact both growth and the outlook for BoE (Shenzhen: 000725.SZ - news) policy," he said.

"We maintain our view that sterling is best played against the crosses like the euro and the Swiss franc and look to sell euro/sterling into rallies."

The euro was down 0.2 percent against the pound 83.47 pence, retreating from a three-month high of 84 pence struck on Wednesday. The pound edged up after data on Wednesday showed the number of Britons claiming jobless benefits fell more than expected while wages ticked up.

On Thursday, the Confederation of British Industry's survey showed factory orders rose slightly more than expected in March.

The pound was also helped from what many saw a hawkish tint in a speech by Bank of England Governor Mark Carney on Tuesday, when he warned that keeping interest rates ultra-low for too long could lead to excess risk-taking and complacency in financial markets. (Reporting by Anirban Nag; Editing by Toby Chopra)