LONDON (Reuters) - Sterling fell to its lowest in nearly 16 months against a basket of currencies on Wednesday before Bank of England minutes that are expected to reiterate a tolerance of higher inflation.
The pound's trade-weighted index dropped to 79.3, its lowest since late October 2011 as the UK currency hovered just above a seven-month low against the dollar and a near 16-month low against the euro.
Investors will also be watching for any comments in the minutes to the policy meeting earlier this month which suggest policymakers want the pound to weaken further.
The minutes, due at 0930 GMT, are expected to mirror last week's Bank quarterly inflation report, which revealed expectations of higher inflation and lower growth.
"The Bank minutes won't be a gamechanger but they will probably strike a dovish tone and that is not going to support sterling," said Nawaz Ali, an analyst at Western Union.
He expected the pound to fall towards $1.53 in the run-up to next month's UK budget with concern growing that rating agencies may downgrade Britain's debt as the government falls behind its debt reduction targets.
"The inflation report has given sterling weakness another dimension and markets are going back to the drawing board in terms of where they think sterling is heading," Ali said.
Sterling traded at $1.5437, just above Tuesday's seven-month low of $1.5414. Traders said strong demand to buy the pound before it hits a reported options barrier at $1.5400 could slow its fall, though offers were reported at $1.5450 up to $1.5500.
The euro was up 0.1 percent at 86.85 pence, having earlier hit a two-week high of 87.005 pence. This brought it close to a peak of 87.17 pence reached on February 1, its highest since late October 2011.
UK labour market data, also due at 0930 GMT, is expected to show a further drop of 5,000 in the claimant count rate of unemployment. A weaker-than-expected reading, however, would push sterling lower.
Selling pressure on the pound against the dollar could gain momentum if policy meeting minutes, due later on Wednesday, from the U.S. Federal Reserve paint a contrasting picture of a stronger U.S. economy and hint at tighter policy in future.
Sterling has shed more than 5 percent against the dollar so far this year and around 7 percent versus the euro.
Editing by Nigel Stephenson