TOKYO/LONDON, Oct 3 (Reuters) - The dollar scaled a more than six-week high versus the yen on Thursday on expectations the U.S. Federal Reserve will not rush to cut interest rates, while the pound tumbled after dovish comments from Bank of England Governor Andrew Bailey.
Sterling hit a two-week low against the dollar after Bailey said in an interview that the central bank could become "a bit more activist" on rate cuts if there was more good news on inflation.
Bailey has sounded more dovish in recent weeks, saying last month he was "optimistic" that inflationary pressures would ease sufficiently for the central bank to cut rates further. In August, he said further rate cuts would not be rushed because it was too soon to be sure inflation was beaten.
Sterling dropped 1% to $1.31140. A more gradual pace of rate cuts by the BoE has helped sterling hit a more than two-year high just last week and outperform its G10 peers this year.
"The Bank of England moving closer to stepping up the pace of rate cuts will start to take some of the shine away from sterling," said Lee Hardman, senior currency analyst at MUFG.
The pound was on track for its steepest daily decline in two years against the euro at 84.16 pence.
The yen has come under pressure since Japan's new prime minister said on Wednesday, following a meeting with the central bank governor, that the country was not ready for further rate hikes.
The safe-haven U.S. currency saw additional demand as tensions simmered in the Middle East following Iran's ballistic missile attack on Israel, which sparked a vow of revenge.
The dollar index, which measures the currency against the euro, yen and four other top rivals, was up 0.2% to 101.30 at 0956 GMT, after hitting a three-week peak of 101.920.
Better than expected U.S. private payrolls data on Wednesday raised expectations for a strong non-farm payrolls reading on Friday that could be critical for the pace of Fed policy easing.
Rising geopolitical risks and expectations for looser policy outside the U.S. have helped the dollar recover from a more than one month low on Friday, Hardman said.
"The market would likely move more if payrolls was weaker than expected, because that would then encourage the rate market to price in a higher bets of a 50 basis point cut from the Fed in November."
Currently, traders lay 34.1% odds of another 50 basis point U.S. rate cut on Nov. 7, according to the CME Group's FedWatch Tool, after the Fed kicked off its easing cycle with such as move last month.
That's down from 49.3% a week ago, but still seems too high, according to Ray Attrill, head of FX strategy at National Australia Bank.
The euro slid to a three-week trough after normally hawkish European Central Bank policymaker Isabel Schnabel took a dovish tone on inflation, cementing bets for a rate cut this month.
The euro was down 0.16% to $1.1027, and earlier touched $1.1025 for the first time since Sept. 12.
The Swiss franc hit to a three-week low against the dollar after softer than expected Swiss inflation data reinforced bets of more rate cuts by the Swiss National Bank.
DOVISH PUSH IN JAPAN
The dollar added 0.3% to 146.950 yen after earlier reaching 147.250 for the first time since Aug. 20.
Dovish Bank of Japan policy maker Asahi Noguchi, who dissented against the rate hike in July, reinforced market views it will be in no rush to lift borrowing costs.
On Wednesday, Japanese Prime Minister Shigeru Ishiba completed his flip from perceived monetary hawk to dove, saying: "I do not believe that we are in an environment that would require us to raise interest rates further."
"Ishiba's comments signal he would like financial markets to remain relatively stable ahead of the snap election that he called earlier this week," said Hardman.
"It just reinforces the markets view that the BOJ might not raise rates again this year and encourages some rebuilding of positioning, particularly amongst leveraged and speculative investors in the short term."
After taking the top job on Tuesday, Ishiba called a snap general election for Oct. 27, four days ahead of the BOJ's next policy decision.
The Australian dollar slid 0.35% to $0.6862, while the New Zealand dollar dropped 0.44% to $0.6235.
Reporting by Kevin Buckland and Medha Singh; Editing by Jamie Freed and Mark Potter
