Sterling firms vs dollar as extreme risk aversion abates

LONDON (Reuters) - Sterling jumped against the dollar on Monday as stock markets rose and investors looked ahead to a further round of central bank interest rate cuts.

The FTSE 100 was up 0.7 percent in early trade .FTSE as investors dipping back into equity markets to shop for bargains after share prices posted their biggest decline ever in October.

While reduced dollar demand and easing risk aversion bolstered high-yielders such as the pound, analysts warned the fundamental picture remained bleak.

"Sterling is going to be quite well supported in coming weeks as speculation about a Bank of England rate cut grows," said Paul Robinson, chief currency strategist at Barclays Capital.

"But, of course, the UK domestic picture remains quite gloomy and will probably get worse. If ... markets start to focus on fundamentals, sterling will come back under pressure," he said.

By 9:30 a.m., the pound was up 1.1 percent against the dollar at 1.6252. The euro was down 0.2 percent at 79.04 pence. Against the yen, sterling was up half a percent on the day at 161.51 yen.

On the data front, the manufacturing sector contracted for a sixth consecutive month in October as falling demand both at home and abroad tipped the sector into recession.

The Chartered Institute of Purchasing and Supply/Markit said its purchasing managers' index ticked up to 41.5 in October from an upwardly revised 41.2 in September -- the second weakest reading since the survey began in 1992.

The European Central Bank and Bank of England are expected to cut rates this week, with UK borrowing costs seen falling by a half point to 4 percent, following reductions last week from China, Japan and the United States.