* Dollar steady vs yen, trades near 3-month highs
* Reports of support for John Taylor as Fed chief
* Aussie dollar sags after lower-than expected Australia CPI
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Jemima Kelly
LONDON, Oct 25 (Reuters) - The dollar climbed to a 3-1/2-month high against the yen on Wednesday, supported by speculation that the next chair of the U.S. Federal Reserve will steer policy in a more hawkish direction.
Sterling was the biggest mover among major currencies, climbing almost 1 percent against the dollar to an eight-day high of $1.3259 after stronger-than-expected UK growth data cemented expectations that the Bank of England will raise interest rates next week.
But elsewhere, the U.S. currency was stronger, on reports that Republican senators were favouring John Taylor to become the next Fed chair.
Taylor, a Stanford University economist, is seen as someone who could put the Fed on a path of faster interest rate increases compared with Fed Chair Janet Yellen, whose term expires next February.
“Given he (Taylor) has been very critical of the Fed causing asset bubbles – and is said to have favoured the Fed raising rates in 2010 – any progress to the Fed Chair would hit bond and then stock markets,” said ING’s head of currency strategy Chris Turner, in London.
The dollar climbed to 114.245 yen, its highest since July 11 , with the Japanese currency also weakening this week after an emphatic victory for Prime Minister Shinzo Abe, whose ultra-loose monetary policy serves to keep pressure on the yen.
Bookmakers’ odds on Taylor becoming the next Fed chair almost doubled overnight, according to RBC Capital Markets, from 18 percent to 34 percent.
“Anything that reduces the probability of Yellen being reappointed necessarily means the Fed looks more hawkish than it would otherwise. The general perception is that there’s no one more dovish than Yellen,” said the bank’s head of currency strategy Adam Cole, in London.
Australia’s dollar tumbled almost 1 percent against its U.S. counterpart, to a 3-1/2-month low of $0.7699 after the September-quarter consumer price index figures came in below market expectations. Investors see less chance of increases in Australian interest rates in coming months.
The euro held steady at $1.1761, with the near-term focus on Thursday’s European Central Bank policy meeting.
According to a Reuters poll of economists, the ECB is expected to announce on Oct. 26 that it will start trimming its monthly asset purchases to 40 billion euros from 60 billion euros in January. (Reporting by Jemima Kelly; Additional reporting by Masayuki Kitano in Singapore and Wayne Cole in Sydney; Editing by Toby Chopra and Jon Boyle)