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FOREX-Dollar buoyant against yen, pound hits 1-year high on inflation jump

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    • Dollar/yen extends rally, hits 12-day high as US yields rise
    • USD capped vs euro as German yield spike neutralises support
    • Sterling hits 1-year high after robust UK inflation data

    (Adds details and quotes, updates prices)

    The dollar was buoyant against the yen on Wednesday, although it was capped against the euro with a potentially supportive spike in U.S. yields neutralised by a similar move by their German counterparts.

    The pound reached a one-year high after a robust UK inflation report added pressure on the Bank of England to do more to support the currency.

    The dollar was a shade lower at 110.085 yen JPY= after rising earlier in the session to 110.295, its highest since Sept. 1.

    The greenback had slumped to a 10-month low of 107.320 yen on Friday, when Hurricane Irma threatened Florida and as financial markets braced for the possibility of another missile or nuclear test by North Korea for the Sept. 9 anniversary of its founding.

    Since then, risk aversion has ebbed significantly, prompting a drive-up in U.S. Treasury yields to two-week highs and fuelling a comeback by the dollar.

    "Dollar/yen shows the highest correlation to U.S. yields and the pair is benefiting from the latest rise in yields," said Yukio Ishizuki, senior currency strategist at Daiwa Securities. "Covering of dollar short positions created by macro-driven funds has been rapid and aggressive under such conditions."

    He also said North Korean concerns "are on a lower boil for the moment and the U.S. debt ceiling issue can be put aside now for the rest of this month. Dollar-negative factors are suddenly decreasing.

    The euro added to modest overnight gains and was last up 0.1 percent at $1.1980 EUR= .

    While the U.S. 10-year Treasury note yield US10YT=RR rose about 5 basis points overnight, its German bund counterpart DE10YT=TWEB jumped nearly 7 basis points, helping prevent the dollar from gaining on the euro.

    German bund yields have risen as safe-haven government debt came under pressure following a respite in North Korea tensions.

    The euro rose to a 2-1/2-year high of $1.2092 last week after a policy meeting by the European Central Bank gave bulls cause for short-term optimism towards potential policy tapering.

    However, the surge puzzled some investors as ECB President Mario Draghi had also said after the meeting that the euro's strength is already weighing on inflation and will be a key factor when it decides next month how to proceed with its massive stimulus programme in 2018.

    "The euro's strength is pressuring ECB's monetary policy and policymakers are also beginning to show concern about the currency appreciating," said Koji Fukaya, president at FPG Securities in Tokyo.

    "The euro's surge has continued for a long time now and while it could somehow extend this rally until October's ECB meeting, I think participants would hesitate to buy the currency above $1.2000."

    Improved euro zone growth can offset some of the negative effects of the euro's strength but a persistent exchange rate shock could drag down inflation, ECB board member Benoit Coeure said on Monday.

    Sterling added to overnight gains to touch $1.3315, its highest in a year.

    Data on Tuesday showed British inflation rose to 2.9 percent in August from a year earlier, more than forecast and above the BoE's 2 percent target.

    The inflation jump is seen complicating the job of policymakers in explaining why they are not raising interest rates. The BoE holds a policy meeting on Thursday.

    The dollar index against a basket of six major currencies inched down 0.1 percent to 91.807. It has managed to remain above the 2-1/2-year low of 91.011 plumbed on Friday.

    The Australian and New Zealand dollars were flat at $0.8021 AUD=D4 and $0.7288 NZD=D4 , respectively.

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