LONDON: Sterling fell against the dollar on Thursday as interest rate differentials moved in favour of the greenback after the Federal Reserve gave an upbeat assessment of the U.S. economy.
The gap between rate-sensitive two-year Treasury yields and British gilts widened, reflecting a view that the Bank of England is likely to keep rates lower until well into 2016 and the Fed could become the first major central bank to lift interest rates later this year.
Sterling fell 0.15 percent to $1.5115, while against the euro it was 0.1 percent lower at 74.65 pence per euro.
"The Fed's outlook on the U.S. economy is positive for the dollar," said Nawaz Ali, market analyst at Western Union. "That is one of the main reasons for sterling to underperform."
Bank of England Chief Economist Andrew Haldane on Wednesday reiterated the message that the BoE was in no rush to raise interest rates and that when hikes do come, they will be gradual, perhaps as little as a half percentage point rise each year.
BoE Governor Mark Carney also said the path to rate rises would be gradual. In a speech late on Wednesday, Carney urged euro zone to do more, including a fiscal union, to escape its slow-growth debt trap.
"His comments show that he is concerned about the problems in the euro zone and its impact on the UK economy," a London based currency trader said.
The euro zone is Britain's biggest trading partner and sluggish growth and the threat of deflation pose downside risks to the UK economy.
In addition, May's general election in Britain look set to be the closest and most widely contested of modern times, raising questions over the shape of government and policy thereafter. That is a cause of worry to investors and is likely to keep them wary about the pound.
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