Sterling at 15-month high vs weak dollar

LONDON: Sterling hit a 15-month high against a broadly weaker dollar on Friday and fell versus the euro as investors braced for a faster pace of tightening by the European Central Bank compared with the Bank of England.

The BoE left interest rates on hold at 0.5 percent on Thursday as expected, and its lack of action will come under scrutiny once again when UK producer price numbers are released at 0830 GMT.

The pound surged to $1.6421 versus the dollar, its highest since January last year, as the US government raced to break a US budget deadlock and avoid a government shutdown. Traders said rumoured option barriers at $1.6400 hit with Asian central banks and Middle-East buyers lining up bids at $1.63.

With the greenback under strong downward pressure -- the dollar index is at its lowest since December 2009 -- analysts said a 16-month high of $1.6459 was a possible target for sterling.

But gains will be checked by its struggle against the euro. Against the euro, sterling was lower at 87.80 pence. The BOE's decision to keep rates unchanged saw the difference between euro zone and UK interest rates widen to 75 basis points after the European Central Bank hiked rates by 25 basis points.

"Against the euro, the British pound will suffer and we have just upgraded our outlook for euro/sterling," said Alejandro Zambrano, currency analyst at FXCM.

"We expect the euro to hit 91.50 pence within the next three months. Inflation is the key, and while the BOE's Mervyn King does not appear too keen to raise rates, we expect the ECB to be on the watch for inflationary pressures."

The UK PPI figures, expected to show the rising cost of oil, food and commodities pushed input prices higher in March, will turn BoE policymakers' attention back to the question of rising consumer price inflation, currently at 4.4 percent.

"Core output prices are the one to watch, if that actually does decline from 3.1 percent to 2.9 percent, then that's actually sterling negative, because that suggests that there's reduction in inflation further down the pipeline," said Kathleen Brooks.