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LONDON - Sterling fell on Tuesday, after surging almost 2% the day before, as investors scaled back some of their expectations for Bank of England interest rates hike following Britain's dramatic U-turn on its fiscal plans.

The battered Japanese yen traded near a 32-year trough to the dollar at 149 yen, putting the major psychological barrier of 150 in focus.

On Monday, new British finance minister Jeremy Hunt scrapped most of Prime Minister Liz Truss's economic plan and scaled back her energy support scheme. The historic policy U-turn aimed to stem a loss of investor confidence since Hunt's predecessor Kwasi Kwarteng announced on Sept. 23 a string of tax cuts with no details of how they would be paid for.

Market participants said that while the reversal helped shore up sentiment it also prompted investors to reassess the outlook for BoE interest rates.

"For the time being, the moves by the Chancellor will reduce the need for the Bank of England to act as aggressively," said James Smith, developed markets economist at ING.

ING expects now a 75 basis-point rate hike in November rather a full-point move expected before the fiscal policy U-turn, Smith added.

The BoE said on Tuesday that it had not decided to delay again the start of its sales of government bonds, after the Financial Times had previously reported that another postponement was likely.

Sterling, which rose after the FT report, fell 0.1% against the U.S. dollar after the central bank's denial to trade at $1.1333 at 1243 GMT.

The dollar has strengthened around 3% against the yen in October, hemmed in by trader nerves following the Bank of Japan's first yen-buying intervention since 1998 on Sept. 22.

Japanese Finance Minister Shunichi Suzuki said after a recent Group of Seven gathering that "there wasn't any discussion on what coordinated steps could be taken" about currency volatility.

UK EFFECT

Investors expected currency markets to remain volatile amid high political and economic risks facing Britain.

"Political developments are moving very fast in the UK... with these developments perhaps helping explain some of the swings in global risk assets," said Shaun Osborne, chief currency strategist at Scotiabank.

In early trade, improved investor sentiment after Britain's policy turnaround and a fall in energy prices lifted the euro and sent the safe haven U.S. dollar to an Oct. 6 low against a basket of currencies.

The euro was volatile weakened against the dollar following German investor sentiment data, which albeit less pessimistic than expected, still painted a bleak picture of Europe's biggest economy.

The single currency was last 0.1% higher at $0.98495 against the dollar.

The dollar index which measures its performance against six major currencies, including sterling, the euro and the yen - was last down 0.1% at 112.00.

A key European benchmark for gas price fell to its lowest level in four months.

"In addition to the now well stocked gas storage, the currently almost summer-like temperatures as well as the first long-term weather forecasts that predict a mild winter are likely to have caused optimism," said Thu Lan Nguyen

FX analyst at Commerzbank.

Britain's policy U-turn saw the risk-sensitive New Zealand dollar surge more than 1%, already lifted by hotter-than-expected consumer inflation data, boosting bets for further rate hikes.

The Aussie also got another boost after it got briefly propped up by minutes of the Reserve Bank's last meeting that showed the decision to slow the pace of rate hikes was "finely balanced."

The central bank's deputy governor Michele Bullock reinforced that in a speech on on Tuesday, saying the RBA can keep pace with tightening by global peers.

The Aussie strengthened 0.7% to $0.6336.