LONDON, Oct 18 - The pound fell on Tuesday, after the new British finance minister's decision to ditch most of the government's "mini-budget" led investors to bet that the Bank of England may not raise interest rates as aggressively as previously expected.

Jeremy Hunt, who replaced Kwasi Kwarteng as finance minister after Prime Minister Liz Truss sacked the latter for his fiscal plan that sent the bond market into a damaging tailspin, reversed most measures in the fiscal plan. That plan had originally contained 45 billion pounds' ($50.88 billion) worth of unfunded tax cuts but Hunt said he would raise over 30 billion in taxes.

Sterling was last down 0.3% against the dollar to trade at $1.1315 and 0.5% weaker versus the euro to 87.00 pence.

A second thorn in the side of sterling investors was the Bank of England's plan to start selling the vast holdings of gilts it amassed during the coronavirus crisis later this month.

The Bank of England said on Tuesday it had not decided to delay again the start of those sales after the Financial Times reported another postponement was likely because of the recent turmoil in British markets.

The central bank said separately that liability-driven investment funds, such as the pension funds that were forced into a firesale of their assets after the mini-budget, were now better prepared to weather any shocks.

With gilt yields, which move inversely to prices, edging lower for a second day, the pound slipped broadly.

"The only thing really to understand in my view is the down-move in yields basically means greater stability and the corollary of that is we're likely to see less aggressive action from the BoE in the short term or the long term," UBP global head of FX strategy Peter Kinsella said.

Kinsella noted that the swaps market now shows traders expect UK rates to peak at 5% in May next year. Previously, they had expected a peak of 5.75%.

"In a sense what's happened is 'what's good for yields is not good for sterling’, because basically what you're seeing is less interest-rate support," he said.

Hunt's plan to reverse most of the tax cuts in the mini-budget and limit a government-imposed cap on energy prices to six months eased some concern about Britain's ability to finance itself.

GILT TRIP

Yields on 30-year gilts were last down 11 basis point at 4.263%, having fallen by almost half a point on Monday, the second-biggest daily drop since the full-point fall on the day the BoE stepped in to pin down yields on Sept. 28.

Sterling is already one of the worst-performing major currencies against the dollar this year, partly because investors expect the Federal Reserve to raise rates more aggressively than the BoE, thereby creating an advantage for U.S. assets over those from elsewhere.

But thanks to sky-high inflation, a cost of living crisis, a slowing economy and the drag on trade from Brexit, the pound has also sunk against the euro, losing 3.3% in 2022.

The pound's volatility has also run at historical highs in the last month. The options market shows that one-week sterling volatility has calmed down to around 15% from a peak of closer to 30% in late September, after the government's mini-budget.

But it's still a lot choppier than its G7 peers. One-week volatility for the euro is closer to 11%, leaving sterling volatility at a 3.5 percentage point premium - double the average of the last five years, according to Refinitiv data.

"We think higher US real rates have contributed to the size of the sell-off in UK asset markets. There are no signs that the Fed wants to reverse this rise in real interest rates anytime soon," ING strategist Chris Turner said.

"And one month GBP/USD implied volatility - now at 16% versus a peak near 22% in late September - may struggle to return to pre-crisis levels of 12% - confirming that trust is hard won and easily lost," he added.

($1 = 0.8844 pounds)

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