LONDON: The dollar scaled a six-year high against the yen and hit a 14-month peak against a basket of currencies on Tuesday, tracking rising U.S. yields after a Federal Reserve study led investors to reassess the prospects for higher interest rates.
Sterling recovered from a 10-month low after Bank of England Governor Mark Carney made comments suggesting the bank might start to raise interest rates in spring. But the boost to sterling was fleeting amid growing worries that Scotland may vote for independence.
Investors had until late August largely ruled out the chance of Scotland breaking away from the three-century old union. But with recent polls indicating the vote is on a knife edge, hedge funds are scrambling to seek protection from further weakness in the pound, driving up volatility.
The dollar index rose 0.15 percent to 84.360. It hit 84.519 at one point, not far from the July 2013 peak of 84.753. A break there will take it to highs not seen since July 2010.
Giving dollar bulls a boost, research from economists at the San Francisco Fed published on Monday noted that investors are pricing in a lower trajectory for interest rate rises than members of the Fed itself.
"The market's interpretation is that perhaps it had better re-price those expectations," said Emma Lawson, senior currency strategist at National Australia Bank.
U.S. two-year yields rose, and the dollar raced to a six-year high of 106.39 yen in European trade. It was last trading at 106.20 yen, still up 0.15 percent.
The euro fell to a fresh 14-month low of $1.2860 in the European trading session, before recovering a tad to trade at $1.2885, still slightly down on the day.
Investors, like Asian central banks, have been avoiding the common currency after the European Central Bank surprised the markets on Thursday with a rate cut and a fresh round of stimulus.
STERLING VOLATILE
Sterling slid to a near 10-month low of $1.6065 in Asian trade. It recovered to trade at $1.6125, up 0.1 percent on the day, on better-than-expected UK industrial data and Carney's comments on interest rates.
But traders took the opportunity to sell the pound at higher levels, given all the uncertainty about which way Scotland will vote in the Sept. 18 referendum.
A TNS poll on Tuesday showed a surge in support for those who wish to break away from the United Kingdom, just days after a YouGov poll for the Sunday Times put the pro-independence "Yes" camp on 51 percent and "No" on 49 percent.
"A poll showing chances of a 'Yes' vote is likely to have much more of an impact on sterling at this point of time," said Geoff Yu, currency strategist at UBS.
Some traders fear a Scottish exit would leave the rest of the UK saddled with higher debt and a smaller domestic market that could hurt future investments and probably push back expectations of a rate hike next year.
A possible downgrade by rating agencies, uncertainty over the sharing of North Sea oil revenues, possible trade barriers between the two countries and more importantly which currency the Scots will use could all combine to cloud the investment and economic outlook for the UK, analysts say.
The head of one of Britain's largest defence suppliers, France's Thales, on Tuesday voiced concerns over jobs and investment if Scotland votes to leave the United Kingdom.
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