Sterling gains as dollar tumbles, markets bet on deeper BoE rate cut

* Graphic: World FX rates in 2020

* Graphic: Trade-weighted sterling since Brexit vote

LONDON, March 9 (Reuters) - Sterling gained further against a sinking dollar on Monday, as coronavirus fears and a slump in oil prices roiled world markets.

Money markets in Britain raised their bets on a Bank of England rate cut later this month to limit the damage. They now price in a rate cut of nearly 50 basis points when the central bank meets on March 26.

Last week, markets were betting on just a 25 bp cut. A few weeks ago, before the spread of coronavirus, no rate cuts were priced in.

Expectations for more rate cuts would normally hurt the pound, but the scale of the dollar’s drop more than offset any selling pressure. The pound hit a more than one-month high against the dollar and was last up 0.8% at $1.3149, after earlier reaching $1.32.

Against the euro, the pound was down 0.3% at 86.79 pence per euro, as the single currency gained alongside other low-yielding currencies such as the Swiss franc and yen.

Sterling has been gaining at the expense of the dollar in recent days as investors fled to safe havens, pushing down U.S. Treasury yields after the U.S. Federal Reserve’s emergency rate cut last week.

Amid widespread volatility, yields on benchmark British government bonds turned negative for the first time ever as panicked investors also rushed to the safety of UK gilts.

The pound’s gains have been underpinned by the Bank of England’s decision not to cut rates immediately. Investors think the central bank will lower rates eventually, but analysts expressed some optimism in Britain’s approach and expect a co-ordinated response between the central bank and government.

Britain’s new finance minister, Rishi Sunak, is due to announce his first budget on Wednesday and a fiscal stimulus plan is widely expected.

“There’s a lot of optimism about the impact of this week’s UK budget, which appears likely to be coordinated with a round of interest rate cuts,” said Marshall Gittler, head of investment research at BDSwiss Group.

“The rate cuts don’t necessarily have to be negative for sterling if the market believes that they’re likely to bring about faster-than-expected growth.”

Reporting by Iain Withers, editing by Larry King