LONDON: The pound had its second consecutive day of losses against a stronger dollar on Tuesday as a new spike in U.S. Treasury yields saw the dollar hit a one-year high, while euro-sterling steadied, pausing its recent downward trajectory.
Accelerating U.S. vaccinations and plans for a major stimulus package stoked inflation expectations and raised Treasury yields, with the safe-haven dollar also finding support as investors weighed up the fallout from the collapse of highly leveraged investment fund Archegos Capital.
At 1512 GMT, the pound was down 0.3pc against the dollar at $1.372.
Euro-sterling fell to as low as 85.12 pence per euro, before the pound eased some gains.
The pair changed hands at 85.485 at 1513 GMT.
Sterling has gained some 4.5pc against the euro so far this year. Analysts say the move is largely due to the pace of the UK's vaccine rollout, which is one of the fastest in the world and aims to offer shots to all adults by the end of July.
Some lockdown restrictions in England ended on Monday, in contrast to much of Europe, where France and Germany are among the countries contending with a third wave of COVID-19 infections and hospitalisations.
"With diverging paths on the vaccination side in the UK and the EU, EUR/GBP may continue to drift lower towards the key 0.85000 support this week," wrote ING strategists in a note.
Commerzbank strategist You-Na Park-Heger struck a more cautious note, writing to clients that "even if the UK emerges more quickly from the corona crisis than for example the EU a large share of the positive news is likely to be priced in already."
She said that risks relating to the economic recovery, including the collapse of British exports to the European Union following Brexit, mean that the Bank of England might continue to maintain its expansionary monetary policy for a long time.
"Even though Sterling is going to be able to benefit from the projected end of the pandemic short-term, medium-term we remain sceptical about Sterling," she said.
Euro zone economic sentiment surged by much more than expected in March, data on Tuesday showed.
The UK's 2-year gilt yield also rose in early trade on Tuesday, up as much as 3 basis points at the 8-day high of 0.112pc.
"The sterling outlook remains positive, the combination of continued vaccinations, lifting of lockdown restrictions and rising yields all converging to support the pound," said Stuart Cole, chief macro strategist at Equiti Capital.
Speculators reduced their net long position on the pound in the week to March 23. Equiti Capital's Cole said that this suggests a "pool of untapped potential support for sterling".
Elsewhere, Britain's financial services minister said that Britain will focus first on regulating stablecoins, rather than the broader cryptocurrency market.