Sterling loses out to dollar's safe-haven muscle

LONDON (Reuters) - The pound rose against the euro on Friday but fell against the dollar, which was lifted by another rout in banking stocks that sent investors fleeing into safe-haven assets.

Sterling was on track to rise 0.2% this week after the Bank of England raised interest rates as expected on Thursday and data earlier in the week showed inflation remained above 10% in February.

The pound was last down 0.6% at $1.2209. Against the euro, it rose 0.3% to 87.93 pence.

"Looking at cable (sterling/dollar), the BoE does not appear to be much of a factor, and our view for dollar downside risks means that the key 1.2420 and 1.2500 levels can be tested quite soon," said ING currency strategist Francesco Pesole.

European bank stocks have been at the epicentre of a sell-off in equity markets this week after the emergency rescue of Credit Suisse by UBS ignited concern about the fragility of the banking sector in light of rising rates and also raised questions about lenders' cost of funding.

The pound touched six-week highs against the dollar earlier this week after the Federal Reserve raised interest rates as expected but signaled that it may not have much more room to tighten monetary policy, particularly given the problems at a number of regional lenders.

With safe-haven concerns outweighing the outlook for interest rates on Friday, the dollar had the upper hand, rising 0.6% against a basket of currencies and on track for its largest one-day gain in more than a week.

UK data on Friday showed a surprise rise in retail sales in February, while businesses reported a second month of growth in March, suggesting the overall economy expanded in early 2023.

"The March flash PMI...shows the UK economy again dodging a recession. Momentum is dripping away though and the UK is definitely not out of the woods yet," Ben Laidler, a strategist at eToro.

(Reporting by Amanda Cooper; Editing by Kirsten Donovan)