Sterling storms ahead; U.S. dollar finally up on yen

An employee counts U.S. dollar notes at a money changer in Jakarta January 27, 2010.

SYDNEY (Reuters) - Sterling held broad gains in Asia on Wednesday as rising UK inflation sparked talk of an early rate hike, while the dollar looked well placed to test the ceiling of a long-held range against the yen after hitting an eight-week high.

Sterling rallied to a 5- month peak against a currency basket after data showing UK inflation jumped to twice the Bank of England's target prompted central bank governor Mervyn King to acknowledge that interest rates might rise more rapidly than economists had expected.

It last traded at $1.6122, having peaked at a high of $1.6170 overnight. The pound has gained some 3 percent against the greenback so far this year.

UK inflation will remain front and center with the BoE's inflation report due at 1030 GMT the next focus.

"Higher inflation is increasing the prospects of interest rate hikes, but the fear of higher interest rates is a problem since UK consumers are highly leveraged," BNP Paribas analysts wrote in a report.

"Nevertheless, a GBPUSD rebound to the upper end of the recent trading range in the 1.6180 area is anticipated and we would view this as a selling opportunity."

While inflation is not yet a problem in the United States, a recent string of upbeat data have fueled gains in U.S. Treasury yields, helping drive the greenback higher against the yen.

The two-year Treasury yield hit a nine-month high near 0.9 percent on Tuesday, but retreated after retail sales slowed in January. The spread over Japan's two-year yield reached an eight month high around 64 basis points last week and was last at 59 bps.

This has helped the dollar rise steadily against the yen in the past nine sessions. It touched an eight-week high around 83.90 yen overnight and last stood at 83.75 yen. But it faces stiff chart resistance at the highs of 84.40 to 84.51 hit in November and December.

"USD/JPY took out resistance at 83.68, and one now starts to look at levels such as 84.51 and even the 200-dma is coming into focus at 85.14. However, there is a lot of ground to cover between here and there," said David Watt, strategist at RBC Capital Markets.

The euro was a touch softer at $1.3485, testing support at $1.3483, the 38.2 percent retracement of the January to February rally.

Renewed worries about the euro zone sovereign debt problems have prompted investors to reassess the Jan-Feb rally, when the euro rose from a low of $1.2871 to a high of $1.3861.

Meanwhile, the Australian dollar slipped below parity as the market favored currencies of countries facing prospects of interest rate hikes.

The Reserve Bank of Australia recently flagged that local rates are on hold for the next few months. The Aussie last traded at $0.9966, after plumbing a 2- week low at $0.9944.

(Editing by Wayne Cole)