The pound fell 0.1 percent against the dollar to $1.6057, though it stayed above a 3-1/2 week low of $1.6010 hit on Friday.

"Sterling-dollar is lower (today) ascribed to the firmer tone of the dollar in the past few days and that could continue this week," said Jane Foley, currency strategist at Rabobank, adding that sterling fundamentals were "pretty weak".

The dollar made substantial gains against the pound last week after minutes from the Fed's December meeting showed some policymakers had considered ending their bond-buying programme as early as this year.

The pound also fell after a survey on Friday showed Britain's dominant service sector shrank for the first time in two years in December, suggesting the economy may have contracted in the fourth quarter.

With little in the way of major UK data early this week, the market will focus on a Bank of England decision on Thursday, where interest rates and the sum of assets purchased under the BoE's stimulus programme are expected to be maintained.

A European Central Bank meeting the same day will also be closely watched, however, and could see the pound rise against the euro.

"The BoE decision is going to be a non-event, but the ECB rate decision could have more opportunity for a surprise from the press conference," said Paul Robson, currency strategist at RBS.

The euro fell 0.25 percent to 81.06 pence, taking it towards a 3-1/2 week low of 80.86 pence hit last week.

The euro was vulnerable to selling with some investors anticipating ECB President Mario Draghi could signal a future rate cut at a post-meeting news conference.

BETTER PROSPECTS

Some analysts said the pound could gain against the dollar later in the week thanks to increased flexibility in bank liquidity rules that could support less liquid and riskier currencies.

"We do see a few new stories that should be supportive of risk and that tends to be supportive of sterling-dollar," RBS' Robson said.

He said relaxation of bank liquidity rules under Basel III as a risk positive factor and could see sterling close above Monday's session high of $1.6080.

Meanwhile, the dollar was expected to take its cue this week from Fed speakers who were likely to elaborate further on their views on an eventual exit from monetary easing.

An end to asset purchases, which tend to be currency negative, would see the US currency strengthen.

Sterling showed little reaction to a survey which unexpectedly showed a rise in UK house prices during December.

Center>Copyright Reuters, 2013