Dollar nudges up, sterling near 14-month highs ahead of BoE decision

By Iain Withers

LONDON (Reuters) -The dollar edged higher and the UK pound was near a 14-month peak on Monday as investors digested a slew of monetary policy decisions by central banks last week and looked ahead to a crunch decision by the Bank of England on Thursday.

Currency market moves have been dominated by central bank efforts globally to curb high inflation, with the dollar index sliding to its biggest weekly fall since January last week after the U.S. Federal Reserve skipped a rate rise.

The dollar index, which measures the U.S. currency against six major counterparts, ticked up 0.2% to 102.480. It remained not far from a one-month low of 102.00 it touched on Friday. U.S. markets are closed on Monday for a holiday.

Investors expect the Bank of England to hike rates by at least 25 basis points when it meets on Thursday, as it battles inflation running at more than four times its target.

The pound is changing hands near 14-month highs against the dollar on expectations UK rate rises will outpace other major economies. The pound edged down 0.2% at $1.27960.

Money markets place a 72% chance of the BoE opting for a 25 basis points hike and a 28% likelihood of a 50 basis point jump.

In a busy week for central banks last week, the European Central Bank on Thursday raised rates by 25 basis points and left the door open to more hikes, while the Bank of Japan’s decision on Friday to stick with its ultra-easy policy kept the yen fragile.

Euro zone inflation is at risk of overshooting recently lifted forecasts and the ECB should err on the side of raising rates too much rather than too little, ECB board member Isabel Schnabel said on Monday.

The bloc’s chief economist Philip Lane earlier said the ECB was likely to raise rates again next month but the September meeting is too far away and the decision will be shaped by incoming data.

The euro dipped 0.2% to $1.09190, trading close to a one-month peak, while the yen was broadly flat at 141.840, near a seven-month low of 142.005 earlier on Monday.

Traders will closely watch U.S. congressional testimony scheduled to be given by Federal Reserve Chair Jerome Powell on Wednesday and Thursday this week for any hints on the future path for rates in the world’s largest economy.

Currency analysts at MUFG said in a note that the testimony was one of the important risk events for the dollar this week, but said they expected similar messaging following the Fed decision last week.

“The Fed was clear that they now felt they could slow the pace of hikes but that the decision to skip a hike this month did not mean the hiking cycle was over,” the analysts said.

Markets are pricing in a 72% probability of the Fed hiking by 25 basis points next month, the CME FedWatch tool showed.

(Reporting by Iain Withers, additional reporting by Ankur Banerjee in Singapore; Editing by Emma Rumney, Marguerita Choy and Sharon Singleton)