U.S. dollar keeps climbing, Canadian dollar soft ahead of rate decision

By Rae Wee and Alun John

SINGAPORE/LONDON (Reuters) - The U.S. dollar extended the previous day's rally on Wednesday, proving too much for the Australian dollar which failed to hold onto gains after surprisingly strong inflation data increased expectations of a resumption of interest rate hikes

Eyes are also on the Canadian currency, with the U.S. dollar up 0.2% on the Loonie at C$1.367, testing a six month peak ahead of a meeting later in the day of the Bank of Canada, which is expected to keep rates unchanged.

The dollar index, which measures the greenback against a basket of six peers, was up 0.2% at at 106.42, having climbed 0.65% on Tuesday, after S&P Global's flash U.S. Composite Purchasing Managers Index rose to its highest level since July.

That potentially gives the U.S. Federal Reserve more room to keep interest rates high, and contrasts with weak European PMI data released the same day, though in a contrary sign, morale among German businesses edged up in October, according to a survey released Wednesday.

The euro was down 0.1% at $1.0577 and the pound was down 0.22% at $1.2133.

The bigger mover of the day was the Aussie dollar, which gained as much as 0.7% to touch a roughly two-week high of $0.6400 after data showed Australia's consumer price index rose 1.2% in the third quarter, above market forecasts for 1.1% and up from a 0.8% increase the previous quarter. [AUD/]

That left traders narrowing the odds on a possible rate increase by the Reserve Bank of Australia (RBA) next month, which would come after four rate pauses.

However, the Aussie couldn't hold onto those gains and was last down 0.2% at $0.634.

"The interesting thing about Australia is that a lot of other central banks are in a very similar position. They have paused, the market's hoping that will be it, but everyone is on tenterhooks hoping that inflation will remain well behaved, and in the case of Australia it has not," said Jane Foley, head of FX strategy at Rabobank.

She said tight labour markets and high oil prices were underpinning fears that inflation could be sticky.

The buoyant U.S. dollar kept the yen pinned near the closely watched 150 threshold, with the Japanese currency last at 149.92 per dollar, keeping traders alert for any signs of intervention by Japanese authorities.

Pressure is mounting on the Bank of Japan to change its bond yield control as global interest rates rise. A hike to an existing yield cap set just three months ago is being discussed as a possibility in the run up to next week's policy meeting, Reuters cited sources as saying earlier this week.

"There is a decent chance there will be a another tweak to yield curve control,~ said Foley. "If we don't see that it is quite possible that we will see the other side of 150 quite soon."

Market participants fear that Japanese authorities will step in to support the currency has meant the dollar's brief recent moves past 150 have not been sustained.

In cryptocurrencies, Bitcoin was last up a touch at $34,247, holding near a roughly 18-month high hit on Tuesday.

The world's largest cryptocurrency has been on a tear this week, having surged 10% on Monday, fuelled by speculation that an exchange-traded bitcoin fund is imminent.

(Reporting by Rae Wee in Singapore and Alun John in London; Editing by Simon Cameron-Moore, Mark Potter and Mike Harrison)