Sterling rises vs dlr in tandem with euro's rally

LONDON, May 20 (Reuters) - Sterling rose to a two-week high versus the dollar on Tuesday, piggybacking on a rally in euro/dollar fuelled by speculation that the next move in euro zone interest rates may be up rather than down.

Without any British data or policymaker comments on Tuesday, sterling took its cue from moves in euro/dollar. The focus will return to domestic issues on Wednesday though, with the release of minutes from this month's Bank of England meeting.

The euro rose after ZEW president Wolfgang Franz said he expects the European Central Bank to tighten policy in the near future -- even as the economic institute's May expectations index fell to its second lowest level in 15 years.

Adding to broad-based dollar pressure was a hawkish statement from the Reserve Bank of Australia, which said it had discussed rate hikes this month, and a lower than expected reading of U.S. producer prices.

"As the dollar has softened more generally on expectations of higher rates elsewhere, sterling inevitably had to follow at some point," said Adrian Schmidt, currency strategist at RBS Global Banking.

"There are a lot of short positions in out there, so there is potential for cable (sterling/dollar) to keep going up."

Sterling rose 1 percent, to as high as $1.9687 <GBP=> by 1340 GMT, on track for its biggest daily gain in two months.

It was little changed versus the euro at 79.47 pence <EURGBP=>.

The BoE minutes are expected to show that eight policymakers voted to keep rates steady at 5 percent, with one in favour of a cut [ECI/GB].