LONDON - Sterling fell on Monday to nine-month lows against the resurgent dollar as a steep rise in U.S. Treasury bond yields overshadowed the Bank of England's hawkish signals.
U.S. yields have surged since last week's Federal Reserve meeting where it said it may start tapering stimulus as soon as November and flagged interest rate increases could follow sooner than expected.
Tuesday's remarks from Fed Chair Jerome Powell signalled nervousness about inflation, and pushed U.S. 10-year yields above 1.54% to the highest since mid June and also led markets to price higher future inflation.
British 10-year gilt yields also rose to the highest since the pandemic started above 1%. But concerns have also grown about how gas and petrol shortages could impact the British economy.
By 1255 GMT the risk-sensitive pound fell 1.2% and traded as low as $1.3538, after touching its lowest since mid January. Versus the euro, it slid 1% to its lowest since July, at 86.23 pence.
"It is all about U.S. Treasuries today as yields climb higher in early trading, placing the whole G10 under pressure," said Simon Harvey, senior FX market analyst at Monex Europe.
"Amid this backdrop, hawkish commentary from Governor Bailey has been a blunt instrument," Harvey added.
Sterling had jumped last week following the Bank of England's hawkish tone on interest rates and its pandemic-era government bond-buying scheme. Governor Andrew Bailey reiterated on Monday that he and other members of the Monetary Policy Committee saw a growing case to raise interest rates.
But analysts said those gains may have been overdone given the other challenges facing the British economy.
Some petrol station pumps ran dry in British cities and vendors rationed sales as a post-Brexit shortage of truckers triggered panic buying and raised fears that hospitals would be left without doctors and nurses.
Standard Chartered senior economist Sarah Hewin said there were headwinds to the economy from the supply bottlenecks.
"Bailey's comments on the economy were pretty downbeat and obviously in the medium-term, that backdrop will be a drag on inflation," Hewin added.
(Reporting by Joice Alves, additional reporting by Sujata Rao. Editing by Robert Birsel and Mark Potter)