US Dollar falls off 7-month highs, sterling rebounds

Frankfurt (Oct 18)  The dollar slipped from a seven-month high against a basket of currencies on Tuesday, following U.S. Treasury yields lower as a sell-off in global bond markets took a pause for breath.

Sterling jumped 1 percent in volatile trade after a British government lawyer said parliament would "very likely" have to ratify any deal to take Britain out of the European Union, and following stronger-than-expected inflation numbers. The greenback had rallied around 3 percent since the end of September, mirroring a climb in benchmark U.S. Treasury yields to a four-month high above 1.8 percent on expectations that the U.S. Federal Reserve will raise interest rates by the end of the year.

But after hitting its highest since March 10, the dollar index, which tracks the greenback against six major rivals, started to slip on Monday and continued that move on Tuesday by falling a quarter of a percent , following a drop in Treasury yields.

Fed Chair Janet Yellen said on Friday that the central bank may allow inflation to exceed its 2 percent target. "Perhaps we're just getting some follow-through from what was essentially a dovish speech from Yellen," said Bank of Tokyo-Mitsubishi UFJ strategist Derek Halpenny, in London.

"(But) it was just Yellen acknowledging what the market is already priced for anyway," he addded. "So in essence the market already believes that's the strategy in play, so there won't be any major fall-out in the dollar from that."

A December rate hike is still the consensus view of markets, with around a 70 percent chance priced in, according to CME FedWatch. But it is far from a done deal.

Fed Vice Chairman Stanley Fischer said on Monday that economic stability could be threatened by low interest rates, but it was "not that simple" for the Fed to hike.

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url= Having hit a 2-1/2-month low of $1.0964 on Monday , the euro climbed back above $1.10.

"You've had a pretty good run in the dollar in the last few weeks so I think this is more profit-taking than a real economic story," said London-based HSBC currency strategist Dominic Bunning. "But generally speaking it's very hard for the dollar to maintain a bull run at the moment, because a stronger dollar acts as a tightening force on the U.S. economy."

The biggest gainer against the dollar was the New Zealand dollar. It jumped more than 1 percent to a two-week high of $0.7214 after better-than-expected inflation data, though at an annual rate of 0.2 percent it was still well below the Reserve Bank of New Zealand's target of 1 to 3 percent.

Source: Reuters