* Dollar: 14-year high vs basket after 2-year manufacturing
* UK manufacturing growth at 2-1/2-year high
* Pound slightly up against the euro
By Jemima Kelly
LONDON, Jan 3 Sterling hit a two-month low
against a dollar that soared to its highest levels in 14 years
against a basket of currencies on Tuesday, the first day of
London trading in 2017.
The pound had earlier hit a two-week high against the euro
after a survey suggested British manufacturing
growth had climbed to a two-and-a-half-year high last month.
The monthly purchasing managers' index (PMI) for the
manufacturing sector rose to 56.1, the strongest reading since
June 2014. That exceeded all forecasts in a Reuters poll, which
pointed to a decline to 53.1, adding to signs that the economy
ended 2016 strongly.
But as the dollar surged after the equivalent U.S.
manufacturing PMI hit a two-year high, sterling weakened against
the greenback, falling to $1.2200 - its weakest since the end of
October - before recovering to $1.2255, still down 0.2 percent
on the day.
Against the euro, though, sterling rose 0.2 percent to 84.98
pence, having earlier traded as strongly as 84.51 pence.
"One has to distinguish between the broad dollar strength we
are seeing right now and ... sterling weakness," said Societe
Generale currency strategist Alvin Tan.
"In the near term, euro/sterling is probably a better gauge
for sterling direction, because the consensus is quite bullish
dollar. But one has to be careful about euro/sterling as we get
into the spring because I think European political risks will
rise, and the euro could weaken for its own reasons."
The pound tumbled 16 percent against the dollar and 14
percent against the euro in 2016, its worst annual performance
in eight years, with the bulk of those falls coming after
Britain voted on June 23 to leave the European Union.
Uncertainty over how Britain leaves the bloc and worries
over the likely economic impact are continuing to weigh on the
currency and mean that even positive data surprises tend to have
only a limited - and temporary - impact on the pound.
"The main question for most economists is still the timing
of the negative impact of the referendum outcome," said RBC
Capital Markets currency strategist Adam Cole said. "It's going
to be hard for sterling to make a lot of traction on the back of
economic data which is still lagging events."
PMI surveys for the construction industry and the UK's
dominant services sector are due on Wednesday and Thursday.
(Additional reporting by Alistair Smout; Editing by Kevin