By Harry Robertson
LONDON (Reuters) -The pound rose for the sixth consecutive session on Tuesday as investors welcomed the British government's U-turn on some tax cuts and the U.S. dollar fell.
Sterling was last up 0.75% at $1.1409, off a session high of $1.1428. The euro was up 0.44% against the pound at 87.16 pence.
The pound dropped to a record low of $1.0327 on Sept. 26 and bond prices tumbled after Kwarteng unveiled plans to slash taxes, particularly for the rich, and ramp up borrowing.
But the dire market reaction, and a likely revolt by his own lawmakers, forced Kwarteng into a U-turn on Monday. He dropped plans to get rid of the 45% top rate of income tax, one day into the ruling Conservative Party's annual conference.
The Bank of England (BoE) last week restarted its bond-buying programme following a dramatic plunge in long-dated gilts, pushing the pound up from its record lows. The currency then rose around 1.7% on Monday after Kwarteng announced his policy reversal.
"Sterling is beginning to find a secure footing after a week of volatility provoked by the policy announcements made by Chancellor Kwasi Kwarteng," Harry Adams, chief executive officer at Argentex Group, said.
Adam Cole, head of foreign exchange strategy at RBC Capital Markets, said a fall in the dollar was the main driver of movements in currency markets on Tuesday.
The U.S. dollar index was last down 0.83% to 110.62 following a drop in U.S. Treasury yields.
U.S. yields, which move inversely to prices, fell on Monday after survey data showed the U.S. manufacturing sector slowed in September. They dropped further on Tuesday after more data showed the number of U.S. job vacancies fell more than expected in August.
The weaker data caused traders to bet the Federal Reserve may raise interest rates less than previously expected.
The yield on the benchmark 10-year U.S. Treasury note was down around 7 basis points on Tuesday to 3.584%, after rising above 4% last week.
"There will be days like today when the dollar is under pressure," Cole said. "We could see that again in the coming days if the more optimistic outlook for assets continues."
Yields on the benchmark UK 10-year government bond fell 12 basis points to 3.832% as investors digested Kwarteng's decision and the BoE's bond purchases.
Britain sold 2.5 billion pounds ($2.8 billion) of 40-year benchmark government bonds at an average yield of 3.371% on Tuesday. That was the highest yield for any gilt sold at auction since 2014, suggesting investors have demanded steep discounts to buy long-dated UK debt.
Despite the recent rally across UK assets, analysts said the outlook for sterling remained gloomy. Adams said he expected the Conservative Party conference to drive further volatility.
"We anticipate sterling to remain highly responsive to the notion of any further changes in government policy," he said. "There is no realistic scenario whereby sterling enjoys a straightforward recovery."
The pound has fallen more than 16% this year as the dollar has surged on the back of the U.S. Federal Reserve's aggressive rate hikes, and as doubts have mounted about Britain's economy and policies. Meanwhile, the dollar index has risen more than 18%, with higher interest rates making U.S. assets look more attractive.
($1 = 0.8773 pounds)