By Joice Alves

LONDON (Reuters) – Sterling fell against a stronger dollar on Friday, retreating from a three-year high touched earlier this week, as a rout in global bond markets sent yields flying and hurt the pound, while the Bank of England warned of inflation risks.

After rising above $1.42 for the first time in three years earlier this week, the pound fell to $1.3890 at 1059 GMT, its lowest since Feb. 18..

Versus the euro, the pound fell 0.1% 87.03, after hitting a 10-day low of 87.30 pence in earlier trading..

Bank of England Chief Economist Andy Haldane warned on Friday of a risk that inflation will prove difficult to keep under control as the economy recovers from the pandemic.

Analysts also attributed sterling’s fall on Friday to a sell-off in bond markets.

Benchmark U.S. Treasury yields vaulted to their highest since the pandemic began, driven by the prospect of accelerating growth and inflation that could trigger a faster rise in interest rates than many expect. Gilt yields also rose sharply on Thursday.

“The aggressive Cable capitulation has seen macro and leveraged players retreating from an increasingly overbought market,” said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.

“The correction came as the UK curve 2-10 flattened by 2bp yesterday and short sterling rallied into the close”.

The pound has strengthened about 2% this year as traders expect Britain’s speedy vaccine roll-out will help the economy rebound from its biggest contraction in 300 years.

Relief over a Brexit trade deal and pushed back expectations for negative interest rates from the Bank of England had also supported sterling.

Sterling was still on track for its fifth consecutive month of gains against the greenback and the euro, with analysts maintaining a positive outlook on the currency.

(For graphic of Sterling monthly performance – https://fingfx.thomsonreuters.com/gfx/mkt/oakperraqvr/Sterling%20monthly%20performance.png)

(Editing by William Maclean)