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UPDATE 3-Sterling drops more than 1% amid U.S. yields surge, UK fuel crisis

·2 min read

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv (Updates headline and rates, adds quotes)

By Joice Alves

LONDON, Sept 28 (Reuters) - Sterling fell more than 1% versus dollar and euro on Tuesday as a steep rise in U.S. Treasury bond yields and fears for the economic impact of a shortage of gas in Britain overshadowed Bank of England comments about a possible interest rate rise.

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.

"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.

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.

"Concurrent to the rising price concerns is the fact that the UK is also currently facing a fuel distribution issue," said Jeremy Stretch, Head of G10 FX Strategy at CIBC Capital Markets.

"If the latter (fuel shortage) were to persist that would amplify concerns over the growth profile".

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.

By 1420 GMT the risk-sensitive pound had fallen 1.3% and traded as low as $1.3529, after touching its lowest since mid January. Versus the euro, it slid 1.2% to its lowest since July, at 86.40 pence.

Sterling had jumped last week following the BoE'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, including Stretch, said they wouldn't expect the bank to follow though with a hike any time soon.

"The bank will want to see how the labour market performs as jobs support measures roll off at the end of this month, prior to acting", he said.

(Reporting by Joice Alves, additional reporting by Sujata Rao; editing by Robert Birsel, Mark Potter and Philippa Fletcher)