The pound headed for its longest rally versus the dollar in more than a year after a report showed U.K. economic growth unexpectedly quickened in the second quarter, stoking expectations of higher interest rates. The U.K. currency rose to a 26-year high this week on speculation the Bank of England will raise rates half a percentage point from 5.75 percent by year-end while the Federal Reserve stays on hold. The pound also advanced as the Fed trimmed its forecast for economic growth and Bear Stearns Cos. reported losses on hedge funds that bet on bonds backed by subprime loans. ``We've been positive on sterling for some time now, and remain so looking ahead,'' said Steven Barrow, chief currency strategist at Bear Stearns Intl. Ltd. in London. ``The rates story favors sterling as does the underlying strength of the U.K. economy.'' Gross domestic product increased 0.8 percent, compared with 0.7 percent in the first quarter, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey was 0.7 percent. The annual growth rate was 3 percent, the same as the previous three months. HBOS Plc, Britain's biggest mortgage lender, yesterday lifted its forecast for house-price growth in 2007 to 6 percent from 4 percent. Expectations for inflation in Europe's second biggest economy have risen this month. The two-year breakeven rate, the yield gap between a regular two-year gilt and its equivalent inflation-linked bond, rose to 3.12 percentage points today from 2.97 percentage points at the end of May. The rate represents inflation expectations over the lifetime of the securities. The highest benchmark bond yields of any Group of Seven nation have lured investors from abroad and pushed the pound higher. Overseas holdings of U.K. government bonds matched a record 30 percent of outstanding securities in the first quarter, according to Debt Management Office figures. Two-year U.K. government notes yielded 86 basis points more than U.S. Treasuries with a similar maturity, more than double that at the start of the year.