(Updates with U.S. morning trade)

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Pound falls as UK inflation below forecasts

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Dollar index down after three-day jump

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Yen rises slightly, eyes on BoJ

By Hannah Lang and Samuel Indyk

NEW YORK/LONDON, Oct 22 (Reuters) - The pound fell on

Wednesday after British inflation in September undershot

forecasts, while the U.S. dollar fell against the Japanese yen.

The British pound was the weakest major currency on Wednesday

after inflation unexpectedly held at 3.8%, undershooting

expectations of economists and of the Bank of England.

Sterling fell by as much as 0.5% against the

dollar. It was last down 0.17% at 1.335.

"When the BoE started sending hawkish signals recently, they

had this out-of-consensus view that inflation would prove

stronger than what markets or economists were expecting and it's

not really proving to be the case at the moment," said Francesco

Pesole, FX analyst at ING.

Investors are pricing in about a 75% chance that the Bank

lowers interest rates by year-end, up from around a 46% chance

before the data.

"Overall, our economists view today's data as providing

meaningful and genuine softer inflation news, and as raising the

risk that the BoE's next rate cut is earlier than their February

meeting base-case," Goldman Sachs analysts said in a research

note.

YEN MARKS BIGGEST MONTHLY DECLINE SINCE JULY

The U.S. dollar was last 0.05% weaker at 151.865 yen.

Against the dollar, the yen hit a one-week low on Tuesday as

sources told Reuters that new Prime Minister Sanae Takaichi is

preparing an economic stimulus package likely to exceed last

year's 13.9 trillion yen ($92.19 billion) to help households

tackle inflation.

The yen has lost 2.5% this month as Takaichi jostled to become

Japan's prime minister, marking its biggest monthly decline

against the dollar since July, as investors anticipated

expansionary fiscal policy and a testy relationship with Japan's

central bank would weigh on the currency.

"Takaichi's first statements as prime minister suggest she

wants to calm markets and not exacerbate any weakness in the yen

for the moment," ING's Pesole said.

Takaichi, an advocate for loose fiscal and monetary policy,

said on Tuesday that it was up to the Bank of Japan to decide

the specifics of monetary policy.

New finance minister Satsuki Katayama said on Wednesday that it

is necessary for the government and the Bank of Japan to

coordinate to make economic and monetary policies effective.

The BoJ is scheduled to announce its latest policy decision

on October 30. Futures imply about a 20% chance of a

quarter-point rate hike to 0.75%.

DOLLAR INCHES UP FOR FOURTH DAY

The dollar index, which measures the dollar's

strength against a basket of six currencies, was last trading at

98.932, down 0.044% after three consecutive days of gains.

President Donald Trump on Tuesday rebuffed a request by leading

Democratic lawmakers to meet until the three-week-old U.S.

government shutdown ends.

The standoff complicates the task facing the Federal Reserve at

its meeting on October 29. But the U.S. central bank is still

expected to lower its key interest rate by 25 basis points next

week and again in December, according to a Reuters poll of

economists who remain deeply divided on where rates will be by

the end of next year.

Fed funds futures imply a 97% probability of a

25-basis-point cut to interest rates, according to LSEG data.

The euro was up 0.03% at $1.16 as a planned summit

between Trump and Russian President Vladimir Putin was put on

hold after Russia rejected an immediate ceasefire in Ukraine.