By Joice Alves

LONDON (Reuters) – Sterling hit its lowest level against the U.S. dollar so far this year on Thursday as investors sold off riskier assets in response to the U.S. Federal Reserve saying it would probably raise interest rates in March.

Traders said they were also monitoring rising political risks in Britain as police opened an investigation into possible COVID-19 lockdown breaches at Boris Johnson’s Downing Street office and residence, the latest blow to a prime minister facing growing calls to resign.

“We have seen sterling/dollar register a fresh year to date low in the wake of the market reflecting upon a more hawkish Fed (and) ongoing UK political risk, as the Gray report continues to hang over the head of the Prime Minister,” said Jeremy Stretch, head of G10 FX strategy at CIBC.

An official investigation by Cabinet Office official Sue Gray into the lockdown parties is due to be published later this week.

Versus the greenback, sterling briefly fell to $1.3359, its lowest level since Dec. 23. It was down 0.5% on the day to $1.3395 at 1615 GMT.

The dollar also rose to multi-week highs against other major currencies, after Fed Chair Jerome Powell surprised investors by leaving the door open to larger and faster than expected interest rate hikes.

Analysts said expectations the Bank of England will itself raise interest rates next week by 25 basis points to 0.50% was preventing the pound from sliding further.

The BoE meets next week and markets expect the further tightening after it raised rates in December to try to rein-in inflation, currently running at more than double the BoE’s target.

Versus the euro, the pound rose 0.3% to 83.24 pence, a six-day high. ING strategists noted that sterling has a “slightly higher beta to risk than the euro”.

Sterling has been a stronger performer against the single currency over the past three months as investors bet the European Central Bank will lag peers in raising rates.

Adding some pressure on the UK economy, British retailers reported a better January for sales than this time last year, when COVID-19 lockdowns kept shoppers at home, but they still judged it as a disappointing rebound.

(Reporting by Joice Alves; Editing by Frank Jack Daniel and Jonathan Oatis)