Dollar gains with Treasury yields, sterling tumbles on hot inflation

By Karen Brettell

NEW YORK (Reuters) - The dollar bounced from two-week lows on Wednesday as benchmark 10-year Treasury yields rose to 14-year highs, while sterling weakened after hotter-than-expected UK consumer price inflation fueled concerns about a deeper recession.

The greenback hit a 32-year peak against the yen, approaching the 150 level at which some traders think the Bank of Japan and Ministry of Finance might intervene.

Treasury yields resumed their march higher as investors maintained expectations that the Federal Reserve will continue to aggressively raise interest 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 or 75 basis point 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. It 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".

Fed Bank of Minneapolis President Neel Kashkari said on Wednesday that job market demand remained strong and underlying inflation pressures probably had not peaked yet.

The Fed's Beige Book on Wednesday showed that U.S. economic activity expanded modestly in recent weeks, although it was flat in some regions and declined in a couple of others, in a report that showed firms growing more pessimistic about the outlook.

The dollar index gained 0.88% against a basket of major currencies to 112.92. The euro fell 0.95% to $0.9771.

The British pound fell 1.02% to $1.1210 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 Bank of England 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 0.43% up on the day at 149.87 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.

Analysts at Credit Suisse said that the yen could weaken beyond 150 if the Japanese central bank maintains this outlook at its meeting on Oct. 27-28.

"We are open to fresh surges higher if the BOJ stands pat at its meeting this month, with minimal respect for the capacity of FX intervention to compress movement," analysts led by Shahab Jalinoos said in a report sent on Tuesday.

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Currency bid prices at 3:09PM (1909 GMT)

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

Previous Change

Session

Dollar index 112.9200 111.9600 +0.88% 18.039% +113.0900 +111.9200

Euro/Dollar $0.9771 $0.9861 -0.95% -14.09% +$0.9873 +$0.9758

Dollar/Yen 149.8700 149.2350 +0.43% +30.19% +149.8850 +149.1000

Euro/Yen 146.45 147.09 -0.44% +12.38% +147.2500 +146.1000

Dollar/Swiss 1.0049 0.9940 +1.15% +10.22% +1.0062 +0.9929

Sterling/Dollar $1.1210 $1.1319 -1.02% -17.16% +$1.1356 +$1.1186

Dollar/Canadian 1.3777 1.3736 +0.32% +8.99% +1.3809 +1.3720

Aussie/Dollar $0.6263 $0.6310 -0.74% -13.85% +$0.6325 +$0.6253

Euro/Swiss 0.9819 0.9803 +0.16% -5.30% +0.9830 +0.9791

Euro/Sterling 0.8715 0.8704 +0.13% +3.75% +0.8729 +0.8682

NZ $0.5664 $0.5686 -0.40% -17.26% +$0.5707 +$0.5650

Dollar/Dollar

Dollar/Norway 10.6285 10.5640 +0.64% +20.68% +10.6560 +10.5675

Euro/Norway 10.3883 10.3856 +0.03% +3.70% +10.4256 +10.3527

Dollar/Sweden 11.2145 11.0750 +0.33% +24.36% +11.2484 +11.0671

Euro/Sweden 10.9598 10.9234 +0.33% +7.09% +10.9795 +10.9219

(Additional reporting by Joice Alves in London; Editing by Emelia Sithole-Matarise and John Stonestreet)

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