Dollar gains with Treasury yields, sterling tumbles on hot inflation

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By Karen Brettell

NEW YORK (Reuters) - The dollar bounced from two-week lows on Wednesday as Treasury yields rose to 14-year highs, while sterling weakened after hotter-than-expected UK consumer price inflation and fears of a deeper recession in Britain bolstered expectations of a less aggressive rate hike by the Bank of England (BoE) in November.

The greenback also hit a 32-year peak against the yen and approached the 150 level where some traders think the Ministry of Finance and Bank of Japan might intervene in the tumbling currency.

Benchmark 10-year Treasury yields resumed their march higher as investors maintained expectations that the Federal Reserve will continue to aggressively raise rates to bring down soaring inflation, boosting demand for the U.S. currency.

The U.S. central bank is expected to lift rates by another 75 basis points when it meets on November 1-2, with an additional 50 basis points or 75 basis points increase also likely in December.

It is “still very much premature to try to fade the dollar,” said Mazen Issa, senior foreign exchange strategist at TD Securities. The greenback will likely continue to gain until momentum in core inflation moderates and the Fed pivots to a less hawkish stance, and “neither are likely in the short term”.

The dollar index gained 0.73% against a basket of major currencies <=USD< to 112.76. The euro fell 0.80% to $0.9782.

The British pound fell 0.61% to $1.1249 after data showed that Britain's annual consumer price inflation inched up to 10.1% in September, rising more than expected and returning to a 40-year high hit in July.

"The outlook for the UK economy remains relatively murky, with ballooning borrowing costs, soaring consumer prices and a government in chaos with its credibility shot to bits unlikely to inspire much confidence," said Matthew Ryan, head of market strategy at Ebury.

Investors expect sterling to remain under pressure amid an outlook for rising inflation and a recession in Britain which could lead the BoE to increase rates by 75 basis points rather than 100 bps at its November meeting.

While interest rate hikes would normally boost a currency, in the case of the United Kingdom the focus is on the degree to which they will harm the already precarious economy.

“The economy is going to suffer and so that means that the currency is going to have to be the release valve to reflect that shift in the outlook on the macro side,” said Issa.

YEN WATCH

The dollar was last 0.32% up on the day at 149.71 yen.

Traders are on high alert for Japan's finance ministry and the central bank to step into the market again, as the currency pair pushes toward the key psychological barrier at 150. A cross of 145 a month ago spurred the first yen-buying intervention since 1998 to prop up the currency.

Japanese Finance Minister Shunichi Suzuki said on Wednesday that he was checking currency rates "meticulously" and with more frequency, local media reported.

The BOJ remains an outlier among a global wave of central banks tightening monetary policy to combat soaring inflation, as it focuses on underpinning a fragile economy.

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Currency bid prices at 10:14AM (1414 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 112.7600 111.9600 +0.73% 17.872% +112.9800 +111.9200

Euro/Dollar $0.9782 $0.9861 -0.80% -13.95% +$0.9873 +$0.9760

Dollar/Yen 149.7050 149.2350 +0.32% +30.06% +149.7750 +149.1000

Euro/Yen 146.44 147.09 -0.44% +12.37% +147.2500 +146.1000

Dollar/Swiss 1.0034 0.9940 +0.99% +10.05% +1.0048 +0.9929

Sterling/Dollar $1.1249 $1.1319 -0.61% -16.81% +$1.1356 +$1.1222

Dollar/Canadian 1.3777 1.3736 +0.32% +8.99% +1.3808 +1.3720

Aussie/Dollar $0.6287 $0.6310 -0.46% -13.60% +$0.6325 +$0.6272

Euro/Swiss 0.9816 0.9803 +0.13% -5.33% +0.9824 +0.9791

Euro/Sterling 0.8695 0.8704 -0.10% +3.51% +0.8729 +0.8682

NZ $0.5670 $0.5686 -0.33% -17.20% +$0.5707 +$0.5658

Dollar/Dollar

Dollar/Norway 10.6010 10.5640 +0.50% +20.51% +10.6535 +10.5675

Euro/Norway 10.3741 10.3856 -0.11% +3.61% +10.4256 +10.3553

Dollar/Sweden 11.1791 11.0750 +0.13% +23.97% +11.2238 +11.0671

Euro/Sweden 10.9375 10.9234 +0.13% +6.87% +10.9568 +10.9219