Sterling falls 0.8% versus dollar as Treasury yields climb

By Joice Alves

LONDON (Reuters) - Sterling fell against a stronger dollar on Friday as Treasury yields climbed, but the pound was still on track for weekly gains amid hopes for an economic recovery following Britain's speedy vaccination programme.

Sterling was down 0.8% against a stronger dollar at $1.3885 at 1548 GMT, as U.S. Treasuries sold off during London trading, pushing the yield on the benchmark note above 1.60%.

Cable fell more than 1 cent during the session, after rising above $1.40 overnight.

"The weaker pound is largely a function of higher yields pushing the U.S. dollar into positive territory," said Neil Jones, head of FX sales at Mizuho Bank. "The market is looking to hedge inflation fears again by buying U.S. dollars."

Versus the euro, sterling fell 0.3% on Friday to 85.97 pence.

In sharp contrast to recent market expectations, Bank of England data showed on Friday the British public's expectations for inflation over the next 12 months held at its lowest level in more than four years.

Sterling has gained almost 6% against the euro in the past three months and more than 4% versus the dollar. It was still on track for weekly gains versus both, amid hopes that Britain's relatively successful COVID-19 vaccine programme will support its economic recovery.

Data showed on Friday that Britain's economy shrank 2.9% in January from December, a less severe decline than expected, as the country went back into a coronavirus lockdown.

The better-than-feared data proved "slightly GBP positive", said ING analysts, adding they expected sterling to continue to trade around 85.50 pence versus the euro.

Also buoying the pound this year were dwindling expectations that the BoE would push interest rates below zero, and a Brexit trade deal signed in December with the European Union.

But data showed on Friday that Britain's exports to and imports from the EU plunged during the first month of the country's new trade relationship with the bloc.

Analysts said the outlook for sterling continued to be positive as the market is expected to look through weak data in the near-term amid the prospect of economic normalisation later in the year.

(Reporting by Joice Alves; Editing by Mark Heinrich and Jonathan Oatis)