Sterling at 3-week high vs dollar, ECB optimism persists
* Sterling rises vs dollar, tracks climb in euro/dollar
* Speculation of ECB action to stem crisis persists
* UK public sector borrowing data due 0830 GMT
By Nia Williams
LONDON, August 21 (Reuters) - Sterling hit a three-week high versus the dollar on Tuesday, tracking gains in euro/dollar with sentiment dominated by expectations of European Central Bank action to tackle the debt crisis, which boosted perceived riskier currencies.
Market players were also looking to UK public sector borrowing figures for July, due for release at 0830 GMT, although analysts said developments in the euro zone would have a bigger impact.
"UK data at the moment matters to sterling at the margin, what matters more is what is going on in the euro area. There is more scope for headline roulette," said Sara Yates, currency strategist at Barclays.
The dollar weakness came as talk of ECB action to ease Spanish and Italian borrowing costs resurfaced after a weekend report that it would target specific yield levels as part of any bond-buying programme, despite the ECB moving to quash that speculation on Monday.
The pound rose 0.3 percent against the dollar to $1.5756, its highest level since late July. Traders said the dollar came under broad pressure after stop loss buy orders were triggered in euro/dollar, adding to the single currency's gains.
Yates said any progress among policymakers on euro zone debt issues could prompt a short-term squeeze higher in sterling against the dollar, but forecast the pound to fall to $1.55 in one month's time given the Bank of England's current bias towards loose monetary policy.
The euro also rose against sterling, climbing 0.3 percent to 78.78 pence.
UK public sector net borrowing for July is expected to decrease from the previous month, and will be used to gauge whether the government is likely to meet its deficit reduction target for this year.
But many analysts said sterling was likely to hold firm even if public borrowing overshoots, after much better than expected retail sales data last week raised expectations UK second quarter GDP would be revised higher on Friday.
"Even if they (borrowing figures) disappoint, which seems likely after June's awful numbers, markets are already looking ahead to this week's expected positive Q2 revision of GDP growth numbers, after an improvement in recent economic data," said Michael Hewson, senior market analyst at CMC Markets.
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