Sterling heads for third straight week of gains against dollar
* Sterling holding above $1.70
* Set for third week of gains for first time since Nov
* Sharpening divergence on US, UK rates drives gains
* Little reaction to higher public borrowing
By Jemima Kelly
LONDON, June 20 (Reuters) - Sterling hovered within touching distance of a 5-1/2-year high against the dollar on Friday, heading for its third consecutive week of gains on rising expectations that Britain will raise interest rates before the United States.
Data on Friday showing the UK's public finances with a bigger-than-expected deficit did little to dent confidence in sterling, which was trading at $1.7061, just shy of the 5-1/2-year high of $1.7064 hit on Thursday.
Any hopes among dollar bulls that the U.S. Federal Reserve would flag growing concerns over inflation - and the need to eventually raise interest rates - were quashed by its Chair Janet Yellen on Wednesday.
By contrast, Bank of England officials in their verbal guidance on policy have brought forward the chance of a rate rise, with markets pricing in a move before the end of this year. That has increased the yield gap between two-year British gilts and U.S. Treasuries by 8 basis points since Wednesday.
Traders said they expected sterling to remain comfortably above $1.70 in the coming weeks.
"The fact that we've pushed above and held above that previous high certainly gives sterling a bit of added credibility and will set us up for some further gains, if not today than in the near future," said Simon Smith, head of research at currency broker FxPro.
Against the euro the pound was broadly stable at 79.83 pence.
Sterling's current strength in part reflects a bad week for the dollar, which is set for its biggest weekly loss in two months against a basket of currencies. But it would be the first time sterling has recorded three consecutive weeks of gains against the dollar since November.
Britain's currency has gained some 10 percent in the past year on expectations a rapidly improving UK economy would prompt the BoE (Shenzhen: 000725.SZ - news) to raise rates before its peers in Europe and the United States.
BoE Governor Mark Carney surprised investors last week by saying rates might rise before many were predicting, prompting investors to bring forward expectations for a hike to later this year from the first quarter of 2015.
In line with Carney's comments, minutes released on Wednesday from the latest meeting of the BoE's Monetary Policy Committee showed members were concerned that markets had priced in a relatively low chance of an interest rate rise in 2014, though none of them voted for a hike this month. (Editing by Susan Fenton)