Dollar leaves rivals for dust, FTSE hits record high

By Marc Jones

LONDON (Reuters) - The dollar powered to a near two-month high on Tuesday, leaving other major currencies for dust but cheering Europe's stock markets as the latest slump in the pound sent London's FTSE to a record high.

The dollar was on the rise again as growing expectations of a U.S. rate hike before the end of the year pushed up Treasury yields - the benchmark for the world's borrowing costs - to the highest since early June.

Europe's bonds managed to resist the selling though oil prices could not as they slipped back from their highest level of the year amid lingering scepticism about OPEC's plans to cut production. [O/R]

Wall Street was expected to start in the red too [.N] but with the dollar running things and little data to get stuck into, the focus stayed on Europe and the record-high FTSE as the pound's tumble improved the look of its international firms' profits. [.EU]

Sterling was back under $1.23 and 90 pence per euro while the dollar muscled its way to an 11-week high as the rising rate hike bets came alongside waning support for Donald Trump in the U.S. election race.

Saxo Bank's head of FX strategy, John Hardy, said the dollar's push and the pound's woes both looked set in for now. On the pound he added: "The whole Brexit scenario is providing the tailwinds here. Real money and real flows have to get out of their exposures to sterling."

Sterling was not the worst performer for once, however. South Africa's rand slumped 3 percent and its bonds tumbled as prosecutors issued Finance Minister Pravin Gordhan with a formal summons in relation to a tax department investigation.

The euro dropped below $1.11 for the first time since early August despite broadly reassuring German sentiment data, while the yen sagged to 103.65 per dollar.

One of the other big global market drivers of recent weeks, oil, eased off a one-year high, meanwhile, to 52.73 a barrel for Brent and $51.01 for WTI as doubts lingered about OPEC plans to cut production. [O/R]

Goldman Sachs said in a note to clients on Tuesday that despite a production cut becoming a "greater possibility", markets were unlikely to rebalance in 2017.

POUND FALLING

The pound's fall was its fourth in a row and sixth in the past seven days. New Bank of England rate setter Michael Saunders said he would not be surprised if it kept going, though he stressed the BoE could overlook the effect of weak sterling on inflation, possibly for years.

"Given the scale and persistence of the UK's current account deficit, I would not be surprised if sterling falls further, but I am fairly agnostic as to whether any further depreciation is likely," Saunders told UK lawmakers in a written submission.

Another new BoE policymaker - University of Chicago academic Anil Kashyap - said seperately that sterling could weaken further if Britain suffers a "hard Brexit", where it loses its preferential trading terms with the European Union.

Kashyap said Britain would not need to lose many financial services jobs to knock a hole in its government finances, something that could further damage the pound's value.

"We still see downside risk (for sterling), particularly against the dollar, but we are aware that this won't be a straight line," said Thushka Maharaj on JP Morgan Asset Management's global multi-asset solutions team.

In Asia overnight, MSCI's broadest index of Asia-Pacific shares outside Japan ended down 1.1 percent, a clear contrast to Japan as the Nikkei closed at its highest in more than a month, thanks to a weaker yen.

Most of Asia's damage was done by South Korea and Samsung as it slumped 7.4 percent after it halted sales of its Note7 phones and told owners to stop using them while it investigates reports of fires in the devices.

China's CSI 300 index advanced 0.2 percent and the Shanghai Composite rallied 0.4 percent, after Beijing unveiled guidelines to cut some of the massive amounts of corporate debt at state-owned companies.

The yuan hit another six-year low meanwhile as the dollar stood tall and market speculation of depreciation grew after the Chinese central bank set a weaker official guidance rate for the currency. [EMRG/FRX]

(Editing by Alison Williams)