By Elizabeth Howcroft
LONDON (Reuters) -Dollar weakness saw the British pound rise to a three-month high on Tuesday, crossing the key $1.42 level, with market optimism about the UK economic recovery also supported by news that UK unemployment fell in the first quarter.
The dollar extended its slide, touching its lowest level since late February, as increased risk appetite lured investors away from the safe-haven greenback.
Expectations that U.S. interest rates would remain low helped offset concerns over rising COVID-19 infections in Asia.
The pound rose above $1.42 for the first time since February in early London trading, reaching as high as $1.422. At 1513 GMT it was up around 0.4% on the day at $1.4194 .
However, it was down 0.1% against the euro, at 86.03 pence per euro.
"At the moment we're seeing the latest leg higher in cable being driven by the broad sell-off in the U.S. dollar," said Simon Harvey, FX analyst at Monex Europe.
"At the same time you’ve got the very preliminary stages of the second reopening which is boosting sentiment but we’re yet to see it translate into how robust the economic recovery will be."
Britain's unemployment rate unexpectedly fell again, to 4.8% between January and March, a period which the country spent under a tight COVID lockdown, and hiring rose further in April.
The data reinforced market expectations that Britain would see a strong economic recovery from the pandemic, helped by its fast pace of vaccine rollout and plans to ease lockdown measures.
"Overall, the labour market continues to show resilience, helped by the government’s support schemes. That is not to say, however, that it is over the worst. The next challenge for the labour market comes as the furlough scheme is withdrawn and closed at the end of September," Cathal Kennedy, European economist at RBC Capital Markets, said in a client note.
Market attention is also focused on a variant of COVID-19 first found in India, although Britain's health minister said on Monday early indications are that vaccines are protecting the elderly against this variant.
British Prime Minister Boris Johnson said there was currently no conclusive evidence to cause a delay to plans to remove coronavirus restrictions in England next month.
Allocation to UK equities in May was the highest since March 2014, Bank of America's survey of 215 fund managers with $625 billion in assets under management showed.
MUFG currency analyst Lee Hardman noted that the pound has now been trading above $1.40 for its longest period since April 2018.
(Reporting by Elizabeth Howcroft; Editing by Susan Fenton and Giles Elgood)