Sterling follows euro higher on Spanish bailout deal

LONDON: Sterling rose against the dollar on Monday, tracking other riskier currencies on relief that Spain's ailing banking sector secured external funding.

But it lagged the euro, which jumped to a near 1-1/2 month peak against the pound.

Traders said investors cut bearish bets on the common currency but that the buying could wane on nervousness ahead of Greek parliamentary elections this weekend and as terms of the Spanish deal are still not clear.

The euro zone agreed on Saturday to lend its fourth-largest economy up to 100 billion euros ($125 billion) to stave off the threat of a bank run and with one eye on Greece, where the crisis could heat up again after the elections.

Sterling was up 0.5 percent against the dollar at $1.5545, not far from a one-week high of $1.5601 struck on Thursday. Offers to sell are cited at $1.5580 and above $1.5600, traders said.

The euro gained 0.3 percent to 81.15 pence, The having risen as high as 81.57 pence during the Asian session, its highest level since early May. The euro jumped more than 1 percent against the dollar to $1.2672, its highest in nearly three weeks.

"We are seeing a knee-jerk reaction on the Spanish bailout news which is helping the euro and sterling against the dollar," said Richard Driver, a currency strategist at Caxton.

"But this will not last as we see euro/sterling head back towards 80 pence and sterling will struggle above $1.56... Nervousness about Greece will kick in before the weekend."

Many investors fear a victory for far-left anti-bailout parties in the country's parliamentary election could push Greece towards a chaotic exit from the euro zone. Analysts expect the pound to gain against the euro as edgy investors again seek alternatives to euro zone assets.

A worsening euro zone crisis also means the risks of a slowdown in the UK are building up, given the region is Britain's biggest trading partner and a business hub for UK banks.

Bank of England policymakers have said more asset purchases could be on the way if the situation in the euro zone deteriorates, all of which is likely to keep sterling's gains against the dollar limited, analysts said.