By Sara Sjolin, MarketWatch

Pound slumps after Carney casts doubt on May rate hike

The dollar headed higher against most rival currencies on Friday, lifted by rising U.S. Treasury yields, which came on the back of a rally in commodity prices that has pushed up inflation expectations.

The pound continued to slide after hints from Bank of England Governor Mark Carney (http://www.marketwatch.com/story/pound-crumbles-after-boes-carney-casts-doubt-over-may-rate-hike-2018-04-20) that the U.K. central bank may hold off on raising interest rates next month.

What are currencies doing?

The ICE U.S. Dollar Index rose 0.1% to 90.016, trading around its highest level since April 9, according to FactSet data. For the week, the index was set for a 0.2% gain, which would break a two-week losing run.

The pound dropped to $1.4055, down from $1.4082 late Thursday in New York. Sterling earlier this week reached $1.4377, its highest level since the U.K.'s Brexit vote in June 2016, but was sent sharply lower late Thursday after dovish comments from the BOE's Carney. The U.K. currency is now on track for a 1.3% weekly loss.

The euro dropped to $1.2311, compared with $1.2345 on Thursday.

The Japanese yen also skidded, with the buck buying Yen107.61, compared with Yen107.37 on Thursday.

What is driving the market?

The dollar advance came as yields on U.S. government paper continued to rise on Friday, as the rate on 10-year notes crept closer to the psychologically important 3% level.

The yield gains came as inflation expectations increased, following a rally in oil and metals prices this week. Higher inflation could put more pressure on the Federal Reserve to speed up the pace of interest rate hikes, which theoretically would be supportive for the dollar.

Meanwhile, the pound took a beating after Carney, in a BBC interview out late Thursday, highlighted a recent run of disappointing economic data and indicated a BOE interest rate hike in May is not a foregone conclusion. Market expectations for a rate rise next month dropped to below 50% after his comments, down from above 80% earlier in the week, according to Bloomberg.

What are strategists saying?

"With the inflationary implications of commodity prices gaining strongly in recent sessions and geopolitical risk fading (for now) there has been a set-up for global bond yields to push strongly higher," said Richard Perry, market analyst at Hantec Markets, in a note.

"How long this push higher in Treasury yields last for could determine the near-term strength of the dollar. However the rally has been assisted by dovish comments from the Bank of England's Governor Mark Carney, who said in an interview to the BBC that markets should not get too far ahead of themselves in expecting a rate hike in May," he added.

Which events could move markets on Friday?

Capping off a busy week of Fed speakers, Chicago Fed President Charles Evans will talk about the economic outlook to the Graaskamp Center Spring Board Conference at 9:40 a.m. Eastern.

(END) Dow Jones Newswires

April 20, 2018 05:47 ET (09:47 GMT)