Pound slips despite jump in gilt yields as investors favour dollar

September 1 (Reuters) - Sterling slipped on Tuesday as investors returned from a long holiday weekend to a global bond selloff that pushed British government borrowing costs to their highest since 2008 and bolstered the dollar.

The pound dipped by 0.07% to 1.35395 against a broadly stronger U.S. currency after a renewed flare-up in U.S.-Iran hostilities that revived inflation concerns.

Hawkish remarks from Federal Reserve Chair Jerome Powell on Friday had also prompted traders to raise expectations of an increase to U.S. interest rates.

A stronger dollar has pushed sterling about 1% below the six-month high of $1.36745 hit late last month, with the focus turning to parliament's return this week as investors look for clues on how new Prime Minister Andy Burnham will fund his plans ahead of the October budget.

Britain's strained public finances remain a key concern, with gilt yields among the highest in the developed world and markets sensitive to any changes in the fiscal outlook.

British 10-year gilt yields rose to their highest since June 2008 at 5.2554% as oil prices topped $92 a barrel.

The Bank of England is widely expected to leave interest rates unchanged at 3.75% this month, though markets continue to price in a quarter-point increase by the end of the year.

Governor Andrew Bailey said on Friday that he saw little evidence that the recent jump in energy prices was generating lasting inflation pressures.

"The Bank of England is uncertain how transitory the price shock will be," said Commerzbank FX analyst Michael Pfister.

British retailers raised prices by the most in more than two years last month as higher energy prices pushed up the cost of some processed food and the AI boom raised the cost of consumer electronics, data showed on Monday.

Economic data on Tuesday painted a mixed picture. Britain's manufacturing activity in August expanded at its slowest pace since March while BOE data showed that lenders approved the fewest mortgages in July since January 2024. The economy remains resilient, however, with GDP rising 0.3% in the latest month and 0.4% over the latest three-month period.

(Reporting by Medha Singh in BengaluruEditing by David Goodman)