* Graphic: sterling and gilt yields bit.ly/2dgAXn1
* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh
By Jemima Kelly
LONDON, Dec 16 Sterling traded close to a
three-week low against the dollar on Friday, recording a second
week of losses against a greenback that has risen sharply on
expectations for a faster-than-anticipated increase in U.S.
The U.S. currency soared to 14-year highs against a basket
of currencies this week after the Federal Reserve on Wednesday
hinted that rates could rise three times over the course of next
year - up from a forecast of two hikes at the Fed's September
Sterling - already weak because of Brexit concerns - skidded
along with other currencies, hitting a low of $1.2378
on Thursday, its weakest since Nov. 23, and closing the day more
than 1 percent down - its weakest performance in two months. On
Friday it edged up to $1.2439 in thin trading volumes.
"A lot of moves at the moment are related to end-of-year
thin liquidity and down to the fact that everyone is trying to
close positions into the end of the year, rather than
fundamental factors," BNP Paribas currency strategist Clara
The pound has been stronger over the past six weeks,
registering its best month in eight years in November and
threatening to break back towards $1.30 for the first time since
the start of September as worries that Britain will lose access
to the European single market faded.
But worries over the start of formal negotiations on
Britain's exit from the bloc, due to start in the first half of
next year, have continued to weigh.
"The pound is still very undervalued from a long-term
perspective so there's obviously a lot of risk and uncertainty
already priced at these levels," said MUFG currency economist
Lee Hardman. He said he expected sterling to stabilise around
the low $1.20s over the coming months.
Against the euro, sterling was flat at 83.80 pence
The pound had tumbled more than 16 percent on a
trade-weighted basis in the wake the Brexit vote in June, but
has since recovered almost half of that. It is now around 9
percent weaker than before the EU referendum against the Bank of
England's trade-weighted index.
The BoE said on Thursday this could soften an expected surge
in British inflation next year.
"We think it's unlikely that the BoE will take a more
hawkish stance despite this rise in inflation, because Brexit
uncertainty remains," said BNP Paribas's Leonard. Like most of
the market, the bank reckons interest rates will remain at their
record lows for the whole of 2017.
(Editing by Alison Williams)