FOREX-Dollar underpinned by Fed tapering views, sterling shines

Wednesday, 13 Nov 2013 | 7:07 AM ET

* Policymaker says possible Fed could trim stimulus next month

Yen near 2-month low vs dollar on higher U.S. bond yields

* Sterling spikes after Bank of England report, UK jobs data

By Anirban Nag

LONDON, Nov 13 (Reuters) - The dollar rose against the euro and hovered close to a two-month high against the yen on Wednesday after an influential member of the U.S. Federal Reserve kept the door open to a first withdrawal in stimulus next month.

European trading was dominated by sterling's outperformance after the Bank of England said there was a chance British unemployment could hit 7 percent in the fourth quarter of 2014.

That kept alive speculation the central bank might raise interest rates far earlier than it has flagged so far, highlighting a divergence between Britain's monetary policy path and that of the European Central Bank and the Bank of Japan.

Sentiment towards the dollar was helped by comments from Atlanta Fed President Dennis Lockhart, seen as a centrist in policy terms, who said on Tuesday a cut in the Fed's bond-buying operations remained a possibility in December.

Attention is now on comments that incoming Fed governor Janet Yellen will make at her Senate confirmation hearing on Thursday.

The euro was also pegged back by more evidence of falling price pressures in the euro zone, reinforcing concerns about easing inflation that led the ECB to cut rates last week. Data on Wednesday showed Spanish prices fell for the first time in four years in October.

The euro fell to $1.3415, down 0.15 percent on the day, dragged down partly by its losses against the pound but holding above the two-month low of $1.3295 struck after Thursday's ECB rate cut.

"The Spanish inflation numbers were slightly below their earlier reading which tells you that the ECB will have to take fresh easing measures," said Alvin Tan, currency strategist at Societe Generale.

"Having said that, we do not expect the euro to fall sharply against the dollar unless we get more signs that the Fed will start to taper. For that, Yellen's confirmation hearings will be important for near-term direction in the dollar."

The dollar eased 0.1 percent to 99.55 yen, not far from a two-month high of 99.80 yen struck on Tuesday. The U.S. currency is up about 0.4 percent so far this week, having drawn strength from rising U.S. bond yields.

Higher U.S. bond yields tend to favour the dollar by making dollar-denominated debt more attractive to bond investors. The 10-year U.S. yield has risen almost 20 basis points since last Friday's strong U.S. jobs data.

Sterling rose to $1.6003, rebounding from Tuesday's two-month low of $1.5854 after a better-than-expected UK jobs report and a raised growth forecast from the central bank.

"The BoE has acknowledged that the UK is doing much better than it had forecast three months ago," said Howard Jones, partner at RMG Wealth Management. "We are certainly long sterling, especially against the euro and the Swedish crown."