Sterling gains against wilting dollar as gloom over trade returns

By Amanda Cooper

LONDON (Reuters) -The pound rallied against the dollar on Thursday amid growing investor pessimism over the lack of any real progress in de-escalating the trade war between the U.S. and China, the world's two largest economies.

U.S. assets, including the dollar, had jumped on Wednesday following a report that President Donald Trump's administration was considering cutting its 145% levy on Chinese imports.

Treasury Secretary Scott Bessent, separately on Wednesday, said high tariffs between his country and China were not sustainable, as Trump's administration signaled openness to de-escalating the trade war, which has raised fears of recession.

For its part, China said on Thursday there had been no negotiations on the economy and trade and it urged the U.S. to lift all unilateral tariff measures if it really wished to resolve the issue, leaving investors roughly where they were earlier in the week in terms of clarity.

The pound, which has risen 6.5% so far this year, last traded at $1.331, not far off its highest in seven months.

Against the euro, sterling has displayed less resilience. The common European currency was up 0.2% at 85.54 pence, not far off early April's 18-month highs.

Sterling, like most currency pairs, has been largely dominated by action in the dollar.

Evidence from data so far this month paints a picture of a slowing British economy, with business activity weakening, along with the public finances.

Figures from the Office for National Statistics on Wednesday showed the British government borrowed almost 15 billion pounds ($19.97 billion) more in the financial year that just ended than official budget forecasters had estimated a month ago, heaping yet more pressure on the public finances.

Finance minister Rachel Reeves has minimal room for manoeuvre based on the government's self-imposed fiscal rules - equivalent to less than 1% of annual spending, meaning investors are watching public sector finance data more closely.

"At this point, you may be wondering why this is relevant to the pound, as developed market currencies tend not to react too strongly to fiscal news," Commerzbank strategist Michael Pfister said.

"However, the UK's recent growth has been almost entirely based on the public sector, with all other sectors moving sideways. And that was before the U.S. tariffs. If the government is now also out of the picture because it has to save more, the growth outlook looks even less rosy," he said.

($1 = 0.7512 pounds)

(Reporting by Amanda Cooper; Editing by Gareth Jones)