Euro, sterling knocked by growth worries and UK inflation at new 40-year high

By Joice Alves and Alun John

LONDON (Reuters) - The euro and sterling fell on Wednesday as investors turned to the safe haven dollar as part of a move away from riskier assets which also saw a stock market rally fizzle out, and after data showed British consumer price inflation hit a new 40-year high.

With investors turning nervous again about global growth prospects, the U.S. dollar gained ground on most peers. The yen hit a fresh 24-year low as rising U.S. and European bond yields contrasted with low Japanese interest rates.

Sterling was down 0.8% at $1.2198, touching its lowest level in almost a week, after British consumer prices rose to 9.1% last month, the highest rate out of the Group of Seven countries, underlining the severity of the cost-of-living crunch.

Mike Bell, global market strategist at J.P. Morgan Asset Management, said as real wages in Britain are already being squeezed by higher prices, increasing borrowing costs further "could feel like rubbing salt in the wound" and elevates the risk of a recession. He, however, expected the Bank of England to keep raising rates in an effort to tackle inflation until clear signs emerge that the labour market is weakening.

"The Bank of England (is) stuck between a rock and a hard place," he said.

Wednesday's other main event is the start of U.S. Federal Reserve Chair Jerome Powell's two-day testimony to Congress, with investors looking for further clues on whether another 75 basis point rate hike is on the cards at the Fed's July meeting.

The dollar index was 0.33% higher at 104.8. The euro fell 0.4% to $1.0497.

The yen was last drifting 0.3% lower at 136.3 per dollar, having hit 136.71 in early trade, its lowest since October 1998.

Analysts see no immediate end to a sell-off that has seen the yen weaken 18% this year from 115.08 at the end of 2021.

The currency has been weakening as higher energy prices put pressure on Japan's current account and because of the ever- widening gap between yields on Japanese government bonds and U.S. Treasuries.

The Bank of Japan last week maintained ultra-low interest rates and vowed to defend its policy of yield curve control (YCC), which effectively caps the yield on the 10-year Japanese government bond at 0.25%.

"Dollar/yen is continuing to trade on the Treasury yields, which have been stable but with the 10-year staying above the 3.20% level while the Bank of Japan has done a lot to defend YCC," said Redmond Wong, market strategist at Saxo Markets Hong Kong.

Commodity currencies Norwegian crown fell 1.3% against the dollar to 9.9740, and the Australian dollar fell 1.1% to $0.6898, as low commodity prices also weighed.