Sterling rose to fresh four-week highs against the dollar on Tuesday as expectations of another hefty interest rate cut by the Federal Reserve kept a lid on the greenback.

The Fed started its two-day policy-setting meeting and is expected to lower its 3.5 percent fed funds rate by up to 50 basis points on Wednesday, following on from last week's emergency 75 basis point cut.

The pound has been gaining ground in the last four sessions as investors pared back expectations of aggressive interest rate cuts by the Bank of England from the current 5.5 percent following comments about inflation from policymakers last week.

A better-than-expected reading for British retail sales growth in January also helped support the currency. The confederation of British Industry said its distributive trades survey reported sales balance fell to +4, from +8 in December, ahead of a forecast zero reading.

"The CBI survey indicates that consumer spending is not collapsing which reinforces the case for the Bank of England to cut interest rates gradually, rather than aggressively given current significant inflation risks," said Howard Archer, an economist at Global Insight.

Markets have priced in about four rate cuts this year and economists are unanimous in predicting that the BoE will lower interest rates next week.

At 1536 GMT sterling was trading at $1.9866 after earlier reaching $1.9929 -- its best level since Dec. 31 -- and up from around $1.9838 late in New York on Monday.

The dollar did gain some traction in late trade on the back of higher-than-expected U.S. durable goods in December.

The euro slipped about 0.3 percent to 74.29 pence, while the pound climbed 0.2 percent against the Japanese currency to 212.44 yen. 

"Sterling is overdue a bit of a rally," said Adrian Schmidt, strategist at RBS Global Banking. "It has been moving against yield spreads for some weeks and although it moved up for the last week broadly speaking, it's still not a very dramatic rally."

Up till late last week, the pound had fallen sharply this year as a flow of negative news on the UK economy bolstered expectations of steep interest rate cuts.