Dollar at 24-year peak to yen after U.S. yields jump; sterling choppy

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By Kevin Buckland and Georgina Lee

TOKYO (Reuters) - The dollar scaled fresh 24-year heights on the yen on Wednesday, breaching levels that prompted intervention by Japanese officials last month, as traders braced for U.S. inflation data and its implications for further Federal Reserve rate hikes.

Sterling slipped to a new two-week trough after Bank of England Governor Andrew Bailey reiterated that the central bank will end its emergency bond-buying program on Friday and told pension fund managers to finish rebalancing their positions within that time frame.

However, the pound rebounded slightly after a report in the Financial Times said the BoE has siganlled privately to lenders that it's prepared to prolong its bond purchases.

The risk-sensitive Australian dollar sank to a 2 1/2-year low.

The dollar strengthened 0.22% to 146.18 yen in Asian trading, after pushing as high as 146.39 for the first time since August 1998.

The Japanese currency is particularly sensitive to the gap between U.S. and Japanese long-term bond yields. The benchmark 10-year Treasury yield jumped to the cusp of a 14-year high overnight at 4.006%, while the equivalent Japanese government bond yield is pinned near zero by the Bank of Japan.

Japanese authorities staged their first yen-buying intervention since 1998 on Sept. 22, when the yen tumbled to as low as 145.90 per dollar.

Chief Cabinet Secretary Hirokazu Matsuno said at a regular media briefing on Wednesday that officials remain ready to take appropriate steps to counter excessive currency moves.

"Given the overriding strong dollar trend in place, it's possible that instead of defending the yen at a particular level, the Bank of Japan would try to slow down the pace of the dollar-yen's rise by defending at a higher level" than previously, said Alvin Tan, head of Asia currency strategy at RBC Capital Markets.

Tan, who expects Japan's currency to weaken to 150 per dollar by the turn of the year, added: "However, the Bank of Japan is also mindful of the rising volatility at the global macro level, (which) is now a bigger driver for potential further intervention than the volatility in any individual currencies."

The BOJ is a major outlier among developed-nation central banks, committing to maintaining its massive bond-buying stimulus even as global policymakers have embarked on a wave of tightening to curb inflation.

The U.S. dollar index - which measures the greenback against a basket of six major peers, including the yen, sterling and the euro - edged 0.08% higher to 113.43, after earlier touching the highest since Sept. 29 at 113.59.

The euro slumped to its weakest since Sept. 29 overnight at $0.9670 and remained not far from that level, trading 0.08% lower than Tuesday's close at $0.96975.

Worries that continued aggressive policy tightening by the Fed and most of its peers will lead the global economy into recession have been a major driver of risk sentiment over recent months.

The International Monetary Fund warned on Tuesday that countries representing a third of world output could be in recession next year, even as it urged central banks to keep up their fight against inflation.

Recent strong U.S. labour market reports have scuppered hopes among some market participants that Fed policymakers may slow the pace of rate hikes into year-end.

The U.S. consumer price report, due on Thursday, could be a flashpoint for currency volatility, and a sharp move higher in dollar-yen could become a trigger for intervention, Joseph Capurso, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY) said.

"But we maintain any intervention‑induced moves in USD/JPY will be unwound within a few weeks," Capurso wrote in a note to clients.

Elsewhere, sterling which earlier touched $1.0925, marking a fresh low since Sept. 29, bounced 0.4% to $1.1008 after the FT report.

Gilt yields had soared earlier on Tuesday following the BoE governor's comments, lifting yields in the U.S. and elsewhere.

"GBP remains at risk of sudden drops because of uncertainty about government debt sustainability and the dislocation in UK pension (superannuation) funds that has spilled over into UK government bond market," Capurso said.

The euro slumped to its weakest since Sept. 29 overnight at $0.9670 and remained not far from that level, trading 0.08% lower than Tuesday's close at $0.96975.

The Aussie sank as low as $0.62395, a level last seen in April 2020, and last traded 0.28% weaker at $0.62555.