Pound up vs broadly weak dollar

LONDON (Reuters) - Sterling rose against a broadly weaker dollar on Thursday after investors took steep rally in oil prices, coupled with ongoing worries about the health of the U.S. financial sector, as a cue to dump the U.S. currency.

A surprising 0.8 percent month-on-month jump in July retail sales supported the pound as it suggested that consumers continue to spend even as the economy deteriorates further

Still, analysts said the data was providing only a limited boost to sterling, pointing out that the pound had relinquished initial gains made on the figures, and remains mired near a two-year low on the view that a weakening economy will require interest rate cuts.

"Markets still seem somewhat bearing on sterling," said Steve Barrow, currency analyst at Standard Bank. "Even when we get more positive news, markets aren't really willing to hold onto those gains."

Dollar selling, which was also prompted by lingering concerns about the health of U.S. mortgage agencies Fannie Mae and Freddie Mac, offered a much-needed support to the pound, pushing it up nearly half a percent higher to $1.8700 by 2:36 p.m., near a session high $1.8711.

The dollar slipped 0.7 percent against a basket of major currencies, also dragged lower by a 3.3 percent climb in U.S. crude prices to $119.40 per barrel.

Still, the UK currency remains in range of $1.8510 hit late last week for the first time in more than two years on the view that UK rate cuts from 5 percent will erode sterling's yield advantage against other currencies.

The pound stayed weak against the euro, which rose 0.2 percent to 79.30 pence.

Analysts expect the currency to continue heading south on the view that the Bank of England will need to cut rates to bolster a deteriorating economy, even as inflation continues to climb.