Sterling slides after BOE jumps into gilt market, dollar marches on

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By Alun John

LONDON (Reuters) - Sterling tumbled again on Wednesday after the Bank of England (BOE) said it would step in to prop up the gilt market, the latest sign of nerves in financial markets which helped nudge the dollar to its latest two-decade peak.

The BOE said it would buy as many long-dated government bonds as needed between now and Oct. 14 to stabilise financial markets, and added that it would postpone next week's start of its gilt sale programme.

As markets tried to digest what this meant for the pound, the currency whipsawed, jumping as high as $1.084 then falling, and was last down 1.5% at $1.0583.

"The pressure on UK rates to rise is breaking financial markets in the UK..., which means they (the BoE) had to move," said John Hardy, head of FX strategy at Saxo Bank.

"As the rest of the world is in tightening mode, this should be sterling negative. We have seen some oddball reactions as the market tried to deal with it, and there was a bit of shift in risk sentiment with people thinking ‘OMG is the Bank of England the canary in the coalmine, will other central banks have to shift?’, but it’s a bit early for that trade."

Long-dated British government prices soared after the announcement and the yield on the 30-year gilt slid around 30 basis points.

Sterling's move came against the backdrop of the dollar resuming its relentless climb.

The U.S. dollar index rose around 0.5% to hit a new high of 114.78, its march higher helped by an equally relentless climb from U.S. treasury yields.

Benchmark U.S. 10-year Treasury yields rose to 4% for the first time since 2010, climbing as high as 4.013% before giving back these gains, as did European government bond yields, after the Bank of England's move. [US/]

The dollar's gains were broad-based, with the euro down 0.37% to $0.9557, and the Australian dollar, which is particularly sensitive to swings in investors sentiment, down 0.56%.

"Resistance (to dollar strength) is futile," ING analysts headlined a morning note.

"Whether it be U.S. data surprising on the upside, the U.S. Administration showing no concern at all with the strong dollar, or new chapters in the energy war in Europe, it looks like all systems are go for the dollar rally."

"Trying to pick a dollar top in the current climate is an exercise in futility."

Elsewhere, the yen was last at 144.7 per dollar, little changed on the day, but still near its lowest levels in years even after Japan's intervention to prop up the fragile currency last week.

Elsewhere in Asia, another milestone fell on Wednesday as China's onshore yuan extended losses to end the domestic session at its lowest level against the dollar since the global financial crisis. The offshore yuan hit a record low, pressured by expectations of further U.S. rate hikes.

There are signs that Chinese policy makers are becoming concerned. Reuters reported on Tuesday, citing a source, that Chinese monetary authorities are asking local banks to revive a yuan fixing tool it abandoned two years ago as they seek to steer and defend the rapidly weakening currency.