* Dollar bounces from 4-month low, led by recovery vs stg
* BoE growth, inflation projections hit sterling
* FT article on threat to US AAA rating weighs on dlr
(Adds quotes, detail, updates prices)
By Jamie McGeever
LONDON, May 13 (Reuters) - The dollar rebounded from a
four-month low on Wednesday, rallying against sterling after the
Bank of England said it expects anaemic UK inflation and the
economy to recover more slowly than previously thought.
The BoE's quarterly inflation report took the wind out of
stocks' sails, sending bank shares down 4 percent and sparking a
wave of profit-taking from sterling's recent rally that
culminated in a four-month high against the dollar on Tuesday.
The dollar had earlier fallen to fresh lows after an article
in the Financial Times flagged the risk of the United States
losing its top sovereign credit rating.
But the BoE report and subsequent comments from Governor
Mervyn King triggered a rebound.
"The overall picture is quite sterling negative. It's more
the recovery profile, which is way too optimistic," said Ian
Stannard, senior currency strategist at BNP Paribas in London.
"(King) was quite pessimistic, and he's probably right to
be."
British inflation will fall to as low as 0.5 percent before
recovering to just above 1 percent in two years, and the economy
will shrink on an annual basis by as much as 4.5 percent at the
start of the second quarter this year before recovering more
slowly than previously thought.
Some analysts took King's comments that he was pleased with
the initial impact of quantitative easing on UK government bond
yields as a suggestion that he may also consider sterling
weakness as an inevitable side effect of QE, which put the pound
under selling pressure.
At 1114 GMT sterling <GBP=D4> was down 0.8 percent on the
day at $1.5148, nearly two cents from levels just before the BoE
report was published.
The dollar index <.DXY>, which measures its performance
against a basket of six currencies, was last flat on the day at
82.32, having earlier hit a four-month low of 81.871.
The euro <EUR=> was up 0.1 percent at $1.3654, retreating
from a seven-week high of $1.3722 on trading platform EBS.
Some in the market said that sterling's losses had prompted
selling in the euro against the dollar as King's comments about
the economy triggered some risk aversion, boosting the U.S.
currency in general.
"The BoE is a large, powerful central bank and what the
governor has to say has global repercussions beyond just the
pound," said Neil Jones, head of European hedge fund sales at
Mizuho in London.
The dollar <JPY=> was down nearly half a percent against the
yen at 95.97 yen.
European shares <> fell 1.5 percent on Wednesday,
while UK stocks <> fell 1.2 percent following King's
testimony.
US RATING
Sterling's sharp fall relieved some of the selling pressure
on the dollar that had intensified since last week's break below
key 200-day and 200-week moving average support levels on
technical charts.
The euro has also broken above similar moving averages
against the dollar.
Earlier on Wednesday, the FT report had helped push the
dollar to fresh multi-month lows, although analysts urged
caution because the United States has run persistent and growing
budget deficits for years, noting that a downgrade would have
huge economic, political and financial implications.
But it put back under the spotlight rising U.S. debt
issuance and foreign central banks' willingness to buy and hold
that paper, a crucial part of funding the country's deficits and
a major crutch for the dollar.
"That's a discussion that's been going on for quite a while,
but is it the reason why the dollar is selling off sharply? I'd
be very cautious, but it does fit with the theme," said Michael
Klawitter, head of currency strategy at Dresdner Kleinwort in
Frankfurt.
"You can argue that if we see U.S. yields rising further,
major central banks holding Treasuries will take a hit and that
will revive discussion on the dollar as the global reserve
currency," Klawitter said.
Talk about the potential for fund repatriation flows from
Japanese investors related to redemptions and coupon payments on
U.S. Treasuries this week also helped push the dollar lower
against the yen, traders said.
The U.S. Treasury Department is due to make $21 billion in
coupon payments on Friday as part of flows tied to its quarterly
refunding moves. Another $52 billion of coupon securities are
due to mature, for a total cash outflow of $73 billion.
Investors also awaited U.S. retail sales data at 1230 GMT.
