13/07/07--Sterling Dips In Profit-Taking But Stays Above $2

LONDON (Reuters)--Sterling slipped against the broadly firmer dollar on Friday, succumbing to a bout of profit-taking after hitting its highest level against the U.S. currency in over a quarter of a century.

The dollar fell to multi-year lows this week on jitters surrounding U.S. mortgage and credit markets -- setting record troughs against the euro -- but recovered some ground on Friday as traders trimmed these bets.

But sterling's losses were limited. The pound remained firmly above the $2.00 mark, with interest rate and yield spreads broadly moving against the greenback over the past month, and demand for the relatively high-yielding pound still strong.

"Maybe people are taking a little bit of money off the table,"said Neil Mellor, senior currency strategist at The Bank of New York. "This is just one of the natural retreats. It doesn't look to be a concerted move (and) I'd expect cable to retest the highs at some point."

At 0725 GMT sterling was down 0.2 percent on the day at $2.0265, having traded as high as $2.0364 on Thursday.

The euro was steady at 67.91 pence.

No UK economic data is due for release Friday, so the main potential for moving sterling could be June U.S. retail sales data at 1230 GMT. They are expected to rise but at a much slower pace than the surprisingly strong rate the previous month.

Bank of England Monetary Policy Committee member Charles Bean speaks at 0800 GMT and traders will be listening for clues on the path of interest rates.

The BoE raised rates earlier this month to a six-year high of 5.75 percent in a bid to cool inflation, inflation expectations and money supply growth.

Financial markets are pricing in a further increase to 6.0 percent by the end of the year and a 50-50 chance of another quarter percentage point increase by March next year.

These rate expectations have burnished sterling's yield appeal across the board. As long as markets retain their hawkish view on the BoE, the pound's downside should be limited, even though market positioning is at extreme levels by some measures.

Asked if cable can remain above the psychologically key $2.00 mark, Mellor at BONY said: "Absolutely. Interest rate differentials have been moving across the board against the dollar. It really is as simple as that."