Dollar climbs with US yields after Fed doves say expect more rate hikes

The U.S. dollar remained elevated on Wednesday following its biggest surge in three weeks against major peers overnight, with Federal Reserve officials talking up the potential for further, aggressive interest rate hikes.

The greenback continued its rise versus the safe-haven yen, extending its best gain for six weeks, as U.S. Treasury yields also rebounded after House Speaker Nancy Pelosi's arrival in Taiwan was met with a strong, but not off-the-scale response by China.

New Zealand's dollar dropped following a surprise rise in the unemployment rate. Australia's currency also tumbled.

The U.S. dollar index, which gauges the currency against six major peers including the yen, was 0.05% higher at 106.50, after rebounding 1% overnight following its slide to a nearly one-month low at 105.03.

The dollar rose 0.51% to 133.84 yen, after jumping 1.2% on Tuesday. Earlier in the day it had sunk to a nearly two-month low of 130.40.

Benchmark long-term Treasury yields, which the dollar-yen pair tends to track closely, were around 2.75% in Tokyo, holding close to overnight highs following a 14 basis point surge.

On Tuesday, San Francisco Fed President Mary Daly and Chicago Fed President Charles Evans signalled that they and their colleagues remain resolute and "completely united" over getting rates up to a level that will more significantly curb economic activity.

The comments by "the normally very dovish Daly" and "the equally very dovish Evans" helped yields and the dollar higher, and the dollar index could top 108 "in the next few weeks," according to Kristina Clifton, a strategist at Commonwealth Bank of Australia, writing in a note to clients.

Traders now see a chance of about 44% that the Fed will hike by another 75 basis points at its next meeting in September.

Pelosi's safe arrival in Taiwan, which China considers a breakaway province, prompted anger in Beijing, with warplanes buzzing the Taiwan Strait and the announcement of live-fire military drills.

"In the lead up to the event there was some geopolitical risk premium being priced," Tapas Strickland, an analyst at National Australia Bank, wrote in a note. But ultimately "with China making a strong, but importantly not an 'unhinged' response," that risk premium was removed, lifting yields and the dollar-yen pair, Strickland wrote.

The euro slipped 0.1% to $1.01555, while sterling lost 0.12% to $1.2144.

The Australian dollar sank 0.44% to $0.689, extending a 1.52% slide from Tuesday, when the nation's Reserve Bank hiked the key rate by another half point, as expected, but opened the door to slowing the pace of tightening.

New Zealand's dollar dropped 0.58% to $0.62185 after a surprise rise in the unemployment rate to 3.3% in the second quarter, when economists had predicted it would ease to 3.1%.

(Reporting by Kevin Buckland; Editing by Kenneth Maxwell)