* Pound strengthens 0.2 pct against dollar to $1.653
* Sterling firms 0.4 against euro to 83.31 pence
* Pound set for second year of gains over dollar
* Traders positioning for possibility of BoE rate hike
By Shadi Bushra
LONDON, Dec 31 Sterling firmed against the dollar in thin trading on Tuesday, hovering near Friday's 28-month highs and putting the pound on track for its second straight year of gains over the dollar.
The pound was up 0.2 percent to trade at $1.653 at 1015 GMT, as investors positioned themselves for the possibility the Bank of England will raise interest rates sooner than it has said it expects to.
The central bank has noted, however, that an overly strong pound could dampen a recovery that remains shaky and uneven.
"The Bank of England has said it's concerned with sterling's strength," ForEx.com research director Kathleen Brooks said.
"The biggest risk for sterling is it may be a victim of its own success."
The pound's gains have been driven in the past six months by a string of data indicating a stronger-than-expected economic recovery in Britain, including last Tuesday's mortgage acceptance figures.
In addition to supporting the pound, the reversal in Britain's fortunes has raised expectations the Bank of England will be the first of the major central banks to hike rates.
The BoE has said it will not consider raising rates until the unemployment rate reaches 7 percent, a threshold Britain may now cross sooner than the Bank had predicted.
The accelerating but consumption-driven recovery has raised concerns that certain sectors, especially the housing market, could overheat in the coming year.
That in turn has triggered greater expectations of a rate hike, further boosting the pound going into the New Year and putting it on track to gain 1.8 percent over the dollar in 2013.
The pound also gained against the euro on Tuesday, up 0.4 percent to trade at 83.31 pence at 1015 GMT.
However, sterling is set to post a yearly loss of 2.5 percent against the euro, which has bounced back from July lows to be on track to become the year's best-performing major currency.