By Lawrence White
LONDON(Reuters) -Sterling hit a four-week high against the dollar on Tuesday as expectations mount the Bank of England (BoE) will hike interest rates, while the greenback dipped as the rapid rise in U.S. Treasury yields in recent days stabilised.
BoE Governor Andrew Bailey on Sunday sent perhaps the clearest signal yet of a pending hike, saying the BoE will "have to act" to deal with rising energy costs in Britain which threaten a surge in consumer prices.
While many countries share Britain's problems of supply chain disruption, labour shortages and soaring energy prices, investors have singled it out as a country especially prone to inflation due in part to Brexit exacerbating bottlenecks.
A November hike could make the BoE the first major central bank to increase rates since the beginning of the COVID-19 pandemic early last year.
Bailey's comments had an immediate impact on bond yields on Monday, with yields on 2-year UK gilts (+13.1 bps) seeing their biggest daily rise since August 2015.
The pound on Tuesday rose 0.6% to $1.3810, a level last seen on Sept. 17.
Rising sovereign debt yields often have the impact of driving the associated currency higher as investors buy the bonds.
The United States experienced the flipside of that dynamic on Tuesday, as a pause in Treasury yield growth reduced demand for the dollar.
(Reporting by Lawrence White Editing by Jason Neely and Mark Potter)