Sterling rises as investors rethink U.S. rate-hike path after SVB collapse

LONDON (Reuters) - Sterling rose against a weakening dollar on Monday after the sudden collapse of U.S. tech-focused lender Silicon Valley Bank (SVB) raised expectations that the Federal Reserve will slow down the pace of its interest rate hikes.

The biggest bank collapse since the 2008 financial crisis roiled markets and weakened the U.S. dollar against major peers as investors price in the possibility that the Fed will take a less aggressive monetary policy tightening path.

The U.S. government announced several emergency measures to shore up confidence in the banking system.

In Britain, HSBC bought the UK arm of SVB for a symbolic one pound on Monday. UK finance minister Jeremy Hunt said the rescue was necessary to help protect some of Britain's most important technology companies.

The Bank of England said on Monday that Britain's banking system was sound after the central bank helped to find a buyer for the British arm of SVB.

Sterling rose 0.4% to $1.2089, after briefly touching an almost two-week high against the dollar. It edged 0.1% higher against the euro to 88.31 pence.

Sterling was capped around recent range highs as the BoE facilitated the purchase of SVB's British arm, "protecting UK depositors", said Shaun Osborne, chief currency strategist at Scotiabank.

"The situation overshadows the Chancellor's spring fiscal announcement due Wednesday, but may not have too much impact on what might amount to a modest giveaway budget to help hard-pressed UK households," he said.

Britain's City and business lobby are clamouring for sweeteners in Wednesday's spring budget to replace generous investment relief that is expiring just as corporation tax is due to rise.

RATE BETS

Investors also bet more heavily on Monday on the possibility that the BoE will halt its run of interest rate increases at its March meeting next week after SVB's failure.

Interest rate futures put the chance of no change in Bank Rate on March 23 at about 45%, up from around 10% last week. Bets on a quarter-percentage point rate hike fell to 55%.

ING strategists said UK labour market data due on Tuesday "should make or break the case for one more BoE hike", adding they expect a 25 basis point hike.

Money markets are also now pricing a 40% chance of the Fed sticking to its current rate and a 60% chance of a 25bps hike. In contrast, the market was pricing a 70% chance of a 50 bps hike before the SVB collapse.

(Reporting by Joice Alves; Editing by Emelia Sithole-Matarise)

By Joice Alves