Sterling slides after BoE buys bonds, dollar hits 20-year high

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By Sinéad Carew and Alun John

NEW YORK/LONDON (Reuters) - Sterling tumbled against the dollar on Wednesday before paring some losses after the Bank of England (BOE) said it would step in to prop up the gilt market, and the dollar index touched a fresh 20-year high trading was volatile.

The BOE said it would buy as many long-dated government bonds as needed between now and Oct. 14 to stabilise financial markets, and added that it would postpone next week's start of its gilt sale programme.

As markets tried to digest what this meant for the pound, the currency whipsawed, jumping as high as $1.084 and falling as low as $1.0539. It was last down 0.4% at $1.0695.

"They're really trying to help the structure of the gilt market, more than anything else... The fact that they're effectively doing (quantitative easing) again, while also hiking rates confuses the monetary policy outlook," said Brad Bechtel, global head of FX at Jefferies in New York.

"It also forces the pound to be the outlet valve for the additional expenditures proposed by the government."

Investors were also eyeing the safety of the dollar against a backdrop of political uncertainty after leaks on Nord Stream pipelines between Russia and Europe spewed gas into the Baltic Sea. NATO Secretary-General Jens Stoltenberg attributed the leaks to acts of sabotage.

"Some of it is safety related, given what we saw yesterday with the NordStream and the Russia Ukraine situation," said Bechtel, also referring to the Federal Reserve's aggressive interest rate hiking cycle aimed at taming inflation

"It is the Fed, outperforming in terms of being aggressive and continuing to hike aggressively. The world is realizing that the U.S. is in a better position to handle higher rates whereas other economies are more vulnerable."

The dollar index, which measures the greenback against a group of major currencies, after earlier hitting a fresh 20-year high of 114.78 was last at 114.100.

While initially the dollar's gains were broad-based, the greenback eased in the U.S. trading morning with the euro last up 0.02% at $0.9595 after falling as low as $0.95355.

The dollar was last down 0.22% against Japan's yen at 144.510 after touching a high of 144.860.

The Australian dollar, which is particularly sensitive to swings in investors sentiment was last up 0.420%.

Elsewhere in Asia, the offshore yuan hit a record low, pressured by expectations of further U.S. rate hikes.