Sterling gains on tax cut U-turn, yen weakens past 145 per dollar

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By Rae Wee and Alun John

SINGAPORE/LONDON (Reuters) - Sterling rose on Monday after Britain reversed a plan to cut the highest rate of income tax while the yen weakened past 145 per dollar, near the level where Japanese authorities intervened last month.

The pound touched a one-week high of $1.128 after media reports of the u-turn, its highest level since Sept. 22, the day before British finance minister Kwasi Kwarteng sent markets tumbling with a new "growth plan" to cut taxes and regulation, funded by vast government borrowing.

Having pared gains, sterling was last up 0.3% at $1.1199.

"We get it, and we have listened," Kwarteng said regarding the reversal of a plan to cut the 45% tax band, one contentious part of the package of measures which drove sterling to an all-time low of $1.0327 and sent gilts spiralling, prompting the Bank of England to step in.

"Clearly sterling has performed better on the news, but there are still a lot of questions, ultimately the 45 pence tax rate was only a small part of the unfunded tax cuts announced,' said Jane Foley, head of FX strategy at Rabobank.

"The question remains is this enough? The answer will be clear in a few weeks’ time when the Bank of England measures end. UK assets, the pound and gilts are not out of the woods yet, and the British government has a lot to do to get back credibility."

The Japanese yen fell to 145.40 per dollar, weakening past 145 for the first time since Sept 22 when authorities intervened to prop up the currency.

The dollar was last up 0.22% at 145.06 yen, with Asian trading thinned by holidays in China, South Korea and some Australian states.

"Each time (dollar/yen) gets to 145, it gets people excited. But it's the magnitude of the move that sometimes matters," said Christopher Wong, a currency strategist at OCBC.

"That said, we remain watchful and won't rule out stealth yen intervention if the magnitude of the yen's decline increases again, perhaps when it breaches 146, using current levels as reference."

Monday's fall came as Finance Minister Shunichi Suzuki said Japan stood ready for "decisive" steps in the foreign exchange market if excessive yen moves persisted.

The yen has been weakening due to Japan's policy of keeping interest rates pinned down at a time when they are rising elsewhere, and after much speculation authorities last month, intervened in markets, spending a record of 2.8 trillion yen ($19.7 billion) to prop up the currency.

The euro was marginally lower at $0.97965, with expectations for another jumbo European Central Bank rate hike this month following a red-hot inflation read-out, heightening worries that the economy will be tipped into a recession.

Data on Friday showed that euro zone inflation zoomed past forecasts to a record high of 10.0% in September, above expectations of 9.7%.

The Australian and New Zealand dollars gained ground ahead of expected rate hikes by their central banks this week with the Aussie up 0.4% at $0.6437 and the kiwi 0.9% higher at $0.5645.