LONDON (Reuters) - The pound gave back some gains against the dollar but remained firm whilst extending losses versus the euro on Tuesday, but strategists said the moves were lacking clout due to holiday-thinned volumes.
"It's hard to be bullish on the UK economy and 2010 will be a difficult year for the UK. Any strength in sterling is just a product of it being undervalued," said Christian Lawrence, currency strategist at RBC Capital Markets in London.
Earlier, sterling gained against the dollar with investors playing catch-up after a UK holiday the previous day and as the London bourse made gains.
"We have foreign exchange option strike-driven moves taking place in sterling today," said Simon Smollett, a foreign exchange options strategist at Calyon in London.
"Normally such options traffic represents 20 percent of daily volumes but in these very thin markets it's more like 60 percent. Insurers and reinsurers who must close accounts by year end are active in the otherwise quiet market," he added.
By 1415 GMT, sterling was up 0.1 percent at $1.6013. Earlier it touched a session high of $1.6070.
Danske Bank said in a technical research note its position was to go short at $1.6020, targeting $1.5805 and stopping at $1.6105.
The euro gained against sterling and was up 0.3 percent at 90.13 pence after peaking at 90.33 pence, its highest level since December 14.
Volumes were thin with many investors not expected back until the new year.
"One should not read too much into the currency moves or the fact that we have historically-low gilt yields which are part of a wider international yields story," said Paul Robinson, chief sterling strategist at Barclays Capital in London.
"These are illiquid markets and there was in fact a sell-off in sterling pre-Christmas."
The FTSE 100 index .FTSE scaled above levels seen at the time of the Lehman Brothers bank collapse in late 2008. .L
Sterling was weighed down last week since a disappointing revision to third quarter UK growth figures, and as minutes from the latest Bank of England policy meeting were perceived as leaving the door open to further monetary easing.
Barclays Capital's Robinson said sterling was likely to hold near present levels as there are no major factors to jolt the currency.
Trade-weighted sterling was at 79.5. Earlier, it hit 79.4 -- matching the November 30 low last hit on December 24.
A Reuters poll last week showed economists almost unanimous in expecting the Bank to leave its asset-buying programme capped at its current level.
A majority of those polled also do not expect the Bank to raise rates until the fourth quarter of 2010 when they see them rising to one percent.
"One of the key issues in 2010 will be what will happen to yields when the central banks pause and then reverse their liquidity measures," Robinson said.
