By Ritvik Carvalho

LONDON (Reuters) – Sterling eased to its lowest level against the dollar in 2-1/2 weeks on Tuesday, as the strengthening U.S. currency put a brake on gains that had taken the pound to 2-1/2-year highs last week.

The pound has so far been the best performing G10 currency in 2021, up 1.65% against the dollar, although its lead over other currencies is diminishing.

Bets that Britain’s rapid vaccine rollout would underpin an economic rebound boosted sterling as far as 4.2% above its year-end price to the dollar as recently as last week.

However, expectations of a faster U.S. economic recovery and for the Federal Reserve to show greater tolerance to higher bond yields than other central banks have boosted the greenback in recent days.

By 1500 GMT, sterling was flat at $1.3931, earlier hitting a 2-1/2 week low of $1.3867. It was flat to the euro at 86.42 pence.

“Sterling lost further ground overnight ahead of tomorrow’s budget announcement on the back of the spike in risk aversion during the Asian session in a context of generalized USD strength,” said Roberto Cobo Garcia, FX strategist at BBVA.

“The prolongation of the recent correction in cable could be due to some profit taking after February’s gains, as the latest macro data appeared too uninspiring to explain the move.”

Garcia said he remains neutral on the pound’s current levels, as both the euro-sterling and sterling-dollar rate have gone a bit “far too fast, given the underlying cycle uncertainties.”

(Graphic: Reflation trade’s big FX winner: GBP, https://fingfx.thomsonreuters.com/gfx/mkt/yxmvjxwmgvr/Pasted%20image%201614674900217.png)

EYES ON UK BUDGET

British house price growth picked up unexpectedly last month, mortgage lender Nationwide said on Tuesday, defying expectations of a slowdown as finance minister Rishi Sunak prepares new budget measures to boost the market.

House prices rose 6.9% in annual terms in February from 6.4% in January, Nationwide said, above all forecasts in a Reuters poll of economists that had pointed to a slowdown to 5.6%.

Sunak said on Sunday he would not rush to fix the public finances as he readied a budget plan which will pile more borrowing on top of almost 300 billion pounds ($418 billion) of COVID-19 spending and tax cuts.

“We’re not expecting too many surprises when the chancellor takes to his feet to deliver one of the most widely leaked budgets in history,” said Robert Alster, chief investment officer at wealth manager Close Brothers Asset Management.

“The key focus will clearly be continued support for the economy, as we navigate our way out of lockdown,” Alster said.

“As things stand, the budget isn’t expected to have a particularly notable effect on the markets, but investors will be keeping a watchful eye on how Rishi Sunak chooses to steer the nation’s finances in the coming months.”

(Reporting by Ritvik Carvalho; editing by Jonathan Oatis)