Pound bounces after new UK finance minister ditches most of 'mini-budget'

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By Amanda Cooper

LONDON (Reuters) - The pound rallied on Monday after Britain's new finance minister ditched most of the government's multi-billion pound "mini-budget", while the Japanese yen touched new 32-year lows, with investors braced for any sign of central bank intervention.

Sterling rallied by as much as 1.4% after Jeremy Hunt, who Prime Minister Liz Truss appointed on Friday, reversed large swathes of the 45-billion pound "mini-budget" that sparked unprecedented market turmoil in which the pound hit record lows and the Bank of England was forced to intervene.

Hunt, who has served as health and culture minister under previous governments, replaced Kwasi Kwarteng, whose package of unfunded tax cuts on Sept. 23 unleashed a bond market sell-off.

Hunt said the country now needed to increase taxes and cut spending to rebuild stability and confidence.

Investors are keeping a close eye on UK government bonds, which rallied in price sharply on Monday, thereby injecting a degree of confidence into the broader market.

"The message is very much one of calm and getting a steady hand back on the tiller. The focus on market turmoil was interesting, being an acknowledgement that the UK and its fiscal policies do not exist in a vacuum, isolated from financial markets," Chris Beauchamp, chief market analyst at IG, said.

"This greater degree of self-awareness, as well as Hunt's reputation as being more of a 'safe pair of hands', certainly seems to have reassured everyone. For now the market seems happy to give the new chancellor time and space to put the government's house back in order."

The pound was last up 1.2% against the dollar at $1.13045. It's regained almost 10% in value since hitting a record low of $1.0327 after the unveiling of the mini-budget.

Yields on the 30-year gilt were down 41 basis points at 4.37%, having veered above 5% at one point last week, forcing long-term investors such as pension funds to scramble for cash to protect their positions.

Meanwhile, the yen hit a new 32-year low of 148.895 against the dollar on Monday, raising the chances that the Bank of Japan will again step in to shore up the currency.

Japan last month intervened to buy the yen for the first time since 1998, after the BOJ stuck to its policy of maintaining ultra-low interest rates, which has battered the currency this year.

Japanese authorities kept up their warnings to the market on Monday of a firm response to overly rapid yen declines, after last week's fall and meetings of global financial leaders that acknowledged currency volatility.

"We are not making the argument that there is a clear line in the sand at 150.00 for Japanese authorities - the whole idea of a 'line in the sand' in the current FX market appears unrealistic - but it’s likely that allowing a move above 150.00 may well trigger an acceleration of the JPY sell-off which is exactly what Japan is trying to avoid," ING strategist Francesco Pesole said in a daily note.

Elsewhere, the dollar fell against a basket of major currencies, trading down 0.1% at 112.88. The euro rose 0.3% at $0.9749, while the Swiss franc fell 0.4% against the dollar to hold at 1.0013 francs, having hit parity on Friday.

Last week's red-hot U.S. inflation print has reinforced bets of another aggressive rate hike from the Federal Reserve, which in turn is boosting the dollar.