Dollar bounces with bets on hawkish Fed; sterling drops

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By Sinéad Carew and Harry Robertson

NEW YORK/LONDON (Reuters) - The dollar rose on Thursday as U.S. Treasury yields increased and investors bet on a relatively hawkish Federal Reserve, while the British pound fell as the UK government unveiled its latest budget update.

The greenback has been falling in recent weeks as inflation data and Federal Reserve commentary implied that it could soon slow the pace of its interest rate hikes.

But at an event on Wednesday, St. Louis Federal Reserve President James Bullard showed a graphic suggesting that even dovish assumptions would require rates to rise to at least around 5%, while stricter assumptions suggest rates above 7%. Rates are currently in the 3.75%-to-4% range after a spate of aggressive hikes.

"We had a short covering euro rally and dollar sell off that's probably run its course now. We think the dollar runs higher from here given the Fed is still the most hawkish central bank in the G10," said Erik Nelson, macro strategist at Wells Fargo (NYSE:WFC) Securities.

"We have heard the ECB get more dovish. The Fed is also possibly going to shift down but from a higher level."

Yet the dollar climbed on Thursday after U.S. retail sales data for October, released on Wednesday, came in stronger than expected.

The euro was last down 0.56% against the dollar at $1.0337 after falling as much as 0.86% earlier in the session. Earlier this week it had briefly touched $1.048, its highest level since July.

The dollar index, which measures the currency against six major peers, was recently up 0.64% at 106.957. After hitting a 20-year high in late September the index had lost more than 8% when it touched its most recent intraday low on Tuesday.

Simon Harvey, senior FX analyst at Monex Europe, said the dollar was consolidating as investors try to work out the direction of the U.S. economy.

"The positive consumption data suggests we don't have a hard landing coming (for the economy). But is that positive for risk assets or will it embolden the Fed to go harder?" he said.

The British pound, which was already trading lower, fell slightly as UK finance minister Jeremy Hunt announced tax increases and tighter public spending in an effort to restore the country's economic reputation and cool inflation.

It was last down 0.95% at $1.18 after earlier falling as much as 1.25% in a move that one analyst said was largely driven by sentiment about the dollar. The euro was up 0.44% against the pound at 87.58 pence.

Bullard's comments came after San Francisco Fed President Mary Daly - until recently one of the most dovish officials - on Wednesday added to doubts about a change of direction from the Fed by saying a pause was off the table.

The greenback was last up 0.68% against the Japanese yen on Thursday to 140.4950 after falling earlier in the day. At its peak for the session so far it had risen 0.83%.

The Aussie dollar was down 1.28% at $0.6655 while the Kiwi fell 1.16% to $0.6077.

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Currency bid prices at 10:16AM (1516 GMT)

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

Previous Change

Session

Euro/Dollar $1.0337 $1.0395 -0.56% -9.07% +$1.0407 +$1.0306

Dollar/Yen 140.4950 139.5500 +0.68% +22.04% +140.7050 +138.8800

Euro/Yen 145.25 145.02 +0.16% +11.46% +145.3600 +144.4600

Dollar/Swiss 0.9529 0.9452 +0.83% +4.47% +0.9536 +0.9435

Sterling/Dollar $1.1800 $1.1913 -0.95% -12.75% +$1.1957 +$1.1765

Dollar/Canadian 1.3359 1.3328 +0.25% +5.67% +1.3400 +1.3314

Aussie/Dollar $0.6655 $0.6741 -1.28% -8.45% +$0.6751 +$0.6635

Euro/Swiss 0.9852 0.9817 +0.36% -4.99% +0.9857 +0.9808

Euro/Sterling 0.8758 0.8720 +0.44% +4.26% +0.8769 +0.8696

NZ $0.6077 $0.6146 -1.16% -11.24% +$0.6168 +$0.6065

Dollar/Dollar

Dollar/Norway 10.1480 9.9930 +1.63% +15.28% +10.1875 +10.0060

Euro/Norway 10.4935 10.3930 +0.97% +4.80% +10.5064 +10.3918

Dollar/Sweden 10.6269 10.4753 +1.00% +17.84% +10.6517 +10.4590

Euro/Sweden 10.9814 10.8728 +1.00% +7.30% +10.9890 +10.8809