Dollar steps back from two-month high, sterling fragile

By Hideyuki Sano

TOKYO (Reuters) - The dollar took a step back from a two-month high against a basket of major currencies on Wednesday after a mixed bag of U.S. economic data slightly tempered expectations of a near-term Federal Reserve rate hike.

The British pound was vulnerable after having suffered its biggest fall in more than two months the previous day as two opinion polls showed a shift among British voters towards leaving the European Union.

The dollar index (.DXY) (=USD) pulled back from Monday's two-month peak of 95.895 to stand at 95.802.

Consumer spending recorded its biggest increase in more than six years in April but consumer confidence dipped and survey on business activity in U.S. Midwest also underwhelmed.

The upshot was slight falls in U.S. bond yields as investors slightly lowered their expectations for a rate hike by the Federal Reserve over the near term.

The euro (EUR=) was little changed at $1.1133 in early trade, keeping some distance from Monday's 2-1/2-month low of $1.1097.

The yen (JPY=) also bounced back to 110.60 yen per dollar, off Monday's one-month low of 111.455.

Prime Minister Shinzo Abe is expected to formally announce a delay to next year's proposed sales tax hike to prevent a blow to the economy in a press conference at 0900 GMT on Wednesday.

His plan to delay the tax hike and adopt new fiscal stimulus measures has fanned speculation the Bank of Japan could adopt further monetary easing as early as this month.

The British pound suffered its biggest fall in more than two months on Tuesday after the two opinion polls showing an increasing support for the "leave" camp surprised investors who had recently bet the chance of "Brexit" would be slim.

The pound licked wounds at $1.4487 (GBP=D4), having fallen 1.1 percent on Tuesday.

Implied volatilities on sterling options (GBPVOL=) jumped sharply and risk reversal spreads, which compare the cost of pound calls and puts, widened in favour of pound puts.

"The market's pricing had been leaning towards Britain staying in Europe. The markets had been becoming too optimistic," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

Yamamoto said the impact of the guessing game on the British referendum on June 23 will go beyond the sterling as rising prospects of "Brexit" could hamper any plans the Fed may have for hiking rates later in June, curbing the dollar's gains.

The Australian dollar stood at $0.7240 (AUD=D4), having scaled a two-week high of $0.7268 on Tuesday after solid local data on net exports boosted expectations for the country's January-March GDP data due later on Wednesday.

Ahead of that, China's official factory survey will be another key focus.

The New Zealand dollar gained 0.4 percent to $0.6789 (NZD=D4), extending its recovery from Monday's two-month low of $0.6676, after data showed an improvement in New Zealand's terms of trade despite expectations of a worsening.

(Editing by Shri Navaratnam)