Sterling hits 14-year high vs fragile dollar

LONDON, Nov 30 (Reuters) Sterling hit 14-year highs and the euro rose towards 20-month highs against the broadly weaker dollar on Thursday, as investors approached the year-end with the view that U.S. interest rates may be headed lower.

The spectre of stagnating or falling rates in the United States compared with rising rates in the UK and euro zone has hurt the dollar in the past week, knocking as much as 3 percent off the value of the greenback against the single currency.

Sterling was last this strong against the greenback in September 1992, when the UK was forced to abandon the European Exchange Rate Mechanism, the precursor to the euro. Technical analysts have their eyes firmly on the pound making the psychological $2 level, last seen when the UK left the ERM.

''We have had a range break, and investors weren't fully positioned for it,'' said Michael Metcalfe, senior strategist at State Street.

''Investors are following the dollar decline, and the U.S.

data seems to be supporting them.'' The euro rose to $1.3190 by 0830 GMT, up a third of a percent from the U.S. close and within half a cent of 20-month highs set in the previous session.

Sterling rose as far as $1.9563, before easing to $1.9536, up nearly half a percent on the day.

Technical analysts said the break of resistance at $1.9550 left few barriers before sterling reached the elusive $2 level.

The dollar was at 116.12 yen, down 0.24 percent from the U.S. close and within one yen of three-month lows set on Monday.

The dollar was also close to 20-month lows against an index of currencies.

''Some players are buying currencies of the countries that are expected to raise rates, while shying away from the dollar with expectations the Fed will not raise rates,'' said a senior dealer at a big Japanese bank in Tokyo.

The euro steadied at 153.09 yen, after hitting a record high around 153.45 yen on Wednesday.

TALK TALK In a heavy data and events calendar on Thursday, euro zone sentiment data and preliminary inflation data for November are due at 1000 GMT, along with revised third quarter GDP data.

With investors on tenterhooks to see if other euro zone policymakers besides French politicians bemoan the recent rise in the euro, European Central Bank officials Gertrude Tumpel-Gugerell, Nout Wellink and Erkki Liikanen speak on Thursday, along with EU Commission President Jose Manuel Barroso.

French Prime Minister Dominique de Villepin said on Wednesday the euro's rise was weighing on competitiveness.

French Finance Minister Thierry Breton said strong movements in currencies were never good, reiterating a call for collective vigilance.

Meanwhile, ECB President Jean-Claude Trichet reiterated late on Wednesday the G7 view that excessive FX volatility was undesirable.

Investors are taking for granted that the ECB will bump up rates to 3.5 percent at its policy meeting in December and is expected to keep hiking next year, closing the gap on the 5.25 percent targeted by the Fed since late June. More UK tightening is also expected, from the current 5 percent.

For more clues about when, or even if, the Fed will cut rates next year, the market will scrutinise October's PCE price index, the Fed's favoured inflation gauge, due at 1330 GMT.

Regional U.S. purchasing managers' reports for November due later in the day will provide clues to the national survey due on Friday, analysts said.

Reuters CS DS1435