Sterling falls ahead of vote on new UK tax

LONDON (Reuters) -Sterling fell for the third straight day on Wednesday, with the U.S. dollar broadly stronger and investors digesting the British government's announcement of a tax hike to fund health spending and social care.

A selloff in global stock markets sent investors seeking safety in currencies such as the U.S. dollar, which also weighed on the pound.

By 1545 GMT, sterling was 0.2% lower at $1.3756. Against the euro the pound dropped by a similar degree to 85.95 pence but later steadied.

The British currency on Tuesday had hit its weakest versus the euro since late July.

Lawmakers are due to vote later on Wednesday on Prime Minister Boris Johnson's tax proposals, which will raise the overall tax burden to the highest in decades.

The government has said the extra revenue is crucial to pay for health and social care as the country recovers from COVID-19 and after a long period of inadequate funding, and it is expected to pass the new legislation easily.

The pound had extended its fall on Tuesday after the announcement. Higher taxes could slow the recovery but, more importantly for the pound, they could also ease pressure on the Bank of England to begin tightening monetary policy.

"The higher taxes on employee earnings and employer wage costs could dampen the strength of the economic recovery from the pandemic in the coming years," said MUFG analysts in a note.

"There is a risk higher taxes will undermine household consumption and hiring by businesses. At the same time fiscal tightening will ease the need for the BoE to tighten monetary policy."

"The pound has strengthened so far this year on the back of rising UK rates but further gains in the coming months are likely to prove more challenging," they added.

They said it would be tough for the pound to break the $1.40 mark or push beyond the 85 pence-per-euro level.

(Reporting by Tommy Wilkes; Editing by Jan Harvey and Gareth Jones)