By Harry Robertson

LONDON (Reuters) -The pound rose as much as 1% on Monday after a report said U.S. President-elect Donald Trump's advisers were considering only applying tariffs to critical imports, a move that could limit the economic impact on other countries.

Sterling rose as high as $1.255 and was last up 0.87% at $1.2532.

The pound fell to $1.2353 last week, its lowest since April, as the dollar rallied on the back of expectations for strong U.S. growth and an increase in tariffs in 2025.

Many analysts think widespread tariffs would hurt other countries economically and could boost U.S. inflation, limiting the scope for Federal Reserve interest rate cuts and so supporting the dollar.

The Washington Post on Monday reported that Trump's aides were exploring plans that would apply tariffs to every country - but only on sectors seen as critical to national or economic security.

That could limit some of the economic impact of tariffs and suggests Trump is wary of being too disruptive early in his second term.

"I think the market’s just going to continue to digest these moves and wait for further insights about whether this is going to be the direction the Trump administration is going to go down," said Lee Hardman, senior currency strategist at Japanese bank MUFG.

Sterling was flat against the euro, with one euro trading at 82.96 pence.

The dollar rallied in late December and early January against a range of currencies, pushing the pound down to its lowest level in months.

The United States is expected to grow considerably faster than other economies including the UK this year, while many investors also expect tariffs to boost the dollar.

Traders on Monday were pricing in around 57 basis points (bps) of interest rate cuts from BOE-BANKS-e57d1808-2900-42bd-832f-d8f2baa8f262>the Bank of England this year, down slightly from late last week. The BOE-e27aa96a-1849-4bf0-93aa-486e3a9568bc>BoE lowered rates by 50 bps to 4.75% in 2024.

Survey data on Monday showed growth in British business activity slowed to a crawl in December and employers cut staffing at the fastest rate in almost four years amid a continuing slump in corporate morale after the government's budget.

(Reporting by Harry Robertson. Editing by Gareth Jones and Mark Potter)