FOREX-Dollar rises to 10-1/2-month peak, lifted by Treasury yield surge

* Euro falls to six-week low vs dollar
* Japan's yen falls versus dollar, euro
* British pound down sharply

(Adds new comment, updates prices)
By Gertrude Chavez-Dreyfuss
NEW YORK, Sept 28 (Reuters) - The U.S. dollar surged to its highest in more than 10
months on Tuesday, tracking the rise in Treasury yields, as investors looked ahead to the
Federal Reserve possibly reducing asset purchases in November and an interest rate hike
likely to follow.
On Tuesday, benchmark 10-year Treasury yields hit a three-month peak, and were last
up four basis points at 1.5253%.
The rise in yields accelerated after the U.S. central bank turned hawkish at last
week's monetary policy meeting, reinforcing the market view for a sooner-than-expected
Fed taper.
"Yields are generally moving higher as rising inflation expectations weigh on the
relative attractiveness of government bonds, but are climbing even faster in the United
States as traders bet the Federal Reserve will move more quickly than its global
counterparts," said Karl Schamotta, chief market strategist at Cambridge Global Payments
in Toronto.
"Rate differentials are tilting toward the dollar, weakening low-yielders and putting
pressure on economies with significant borrowing needs."
In afternoon trading in New York, the U.S. dollar index reached its highest level
since early November and was last up 0.3% at 93.719.
Risk aversion exacerbated the currency market moves, said Neil Jones, head of FX
sales at Mizuho, with Wall Street shares down.
The Australian dollar, which is seen as a liquid proxy for risk appetite, dropped
0.6% at US$0.7240.
The euro was down 0.1% versus the dollar at $1.1681. Earlier in the
session, it hit a six-week low of $1.1668, after comments from U.S. Treasury Secretary
Janet Yellen, saying that U.S. inflation at the end of the year would be closer to 4%,
double the Fed target.
"One theme that seems to be gaining traction is that the market lies on the cusp of
reassessing the path for the Fed tightening cycle," ING strategists wrote in a note to
clients.
"A big move higher in the short-end is the key reason why we are bullish on the
dollar, particularly from 2Q next year, but we will closely monitor and reassess whether
that move needs to come earlier - largely a function of timing the take-off in short-end
rates."
The Japanese yen weakened to its lowest level in nearly three months against the
dollar. The greenback was last up 0.5% at 111.57 yen..
The yen is the G10 currency most correlated with U.S. two-year and 10-year Treasury
yields, MUFG currency analyst Lee Hardman said in a note to clients.
Minutes from the Bank of Japan's July meeting showed that some central bank
policymakers warned of the risk of a delay in the country's economic recovery.

The British pound, meanwhile, was down 1.2% at $1.3532. The currency jumped last week
after a hawkish tone by the Bank of England, but analysts struck a cautious note on the
currency as Britain struggled with supply chain chaos due to a shortage of truck drivers.


========================================================
Currency bid prices at 3:02 PM (1902 GMT)
Description RIC Last U.S. Pct Change YTD Pct High Bid Low Bid
Close Change
Previou
s
Session
Dollar index 93.7590 93.4110 +0.39% 4.199% +93.8050 +93.3600
Euro/Dollar <EUR=EBS $1.1676 $1.1695 -0.15% -4.43% +$1.1704 +$1.1668
>
Dollar/Yen <JPY=EBS 111.5950 111.0100 +0.53% +8.00% +111.635 +110.935
> 0 0
Euro/Yen <EURJPY= 130.28 129.79 +0.38% +2.65% +130.360 +129.680
> 0 0
Dollar/Swiss <CHF=EBS 0.9299 0.9257 +0.45% +5.11% +0.9302 +0.9259
>
Sterling/Dol $1.3531 $1.3706 -1.25% -0.94% +$1.3717 +$1.3522
lar
Dollar/Canad 1.2676 1.2629 +0.36% -0.47% +1.2707 +1.2594
ian
Aussie/Dolla $0.7238 $0.7287 -0.66% -5.90% +$0.7311 +$0.7226
r
Euro/Swiss <EURCHF= 1.0857 1.0824 +0.30% +0.46% +1.0859 +1.0826
>
Euro/Sterlin <EURGBP= 0.8626 0.8538 +1.03% -3.48% +0.8640 +0.8526
g >
NZ $0.6954 $0.7014 -0.86% -3.17% +$0.7026 +$0.6943
Dollar/Dolla
r
Dollar/Norwa 8.6650 8.6010 +0.80% +0.97% +8.6815 +8.5990
y
Euro/Norway <EURNOK= 10.1163 10.0530 +0.63% -3.35% +10.1426 +10.0475
>
Dollar/Swede 8.7361 8.7079 +0.21% +6.58% +8.7499 +8.6971
n
Euro/Sweden <EURSEK= 10.2003 10.1792 +0.21% +1.23% +10.2166 +10.1750
>


(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Elizabeth Howcroft in
London; Editing by Bernadette Baum, Susan Fenton and Mark Heinrich)