* Dollar index inches away from 7-month highs
* Kiwi jumps on better-than-expected inflation data
* Aussie firms as RBA chief expresses comfort with FX levels
By Jemima Kelly
LONDON, Oct 18 (Reuters) - The dollar eased back from a seven-month high against a basket of major currencies on Tuesday, following U.S. Treasury yields lower as a sell-off in global bond markets took a pause for breath.
The greenback had rallied around 3 percent since the end of September, mirroring a climb in benchmark U.S. Treasury yields to a four-month high above 1.8 percent, as expectations have grown that the U.S. Federal Reserve will raise interest rates by the end of the year.
But after hitting its highest since March 10, the dollar index - which tracks the greenback against six major rivals - slipped 0.2 percent to 97.711, following a fall in Treasury yields.
"You've had a pretty good run in the dollar in the last few weeks so I think this is more profit-taking than a real economic story," said HSBC currency strategist Dominic Bunning, from London.
"But generally speaking it's very hard for the dollar to maintain a bull run at the moment, because a stronger dollar acts as a tightening force on the U.S. economy. As the dollar rallies that actually creates a similar impact in the U.S. in terms of inflation and everything else as a rate hike, so that makes it harder for the Fed to raise rates in December."
A December rate hike is still the consensus view of markets, with around a 70 percent chance priced in, according to CME FedWatch. But it is far from a done deal.
Fed Vice Chairman Stanley Fischer said on Monday that economic stability could be threatened by low interest rates, but it was "not that simple" for the Fed to hike. And Fed Chair Janet Yellen said on Friday that the central bank may allow inflation to exceed its 2 percent target.
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The biggest gainers against the dollar were the Australian and New Zealand dollars, which tend to move in sync with each other but which were also driven by their own domestic factors.
The kiwi jumped almost 1 percent to a two-week high of $0.7199 after better-than-expected inflation data from New Zealand, though at an annual rate of 0.2 percent it was still well below the Reserve Bank of New Zealand's target of 1 to 3 percent.
"We believe that the low inflation print is still consistent with recent RBNZ rhetoric signalling that they are likely to lower their key policy rate further in November," said Bank of Tokyo-Mitsubishi UFJ currency economist Lee Hardman, adding that the scope for the kiwi to lift further was therefore limited.
The Australian dollar gained as much as 0.9 percent to $0.7686, getting a tailwind from Reserve Bank of Australia Governor Philip Lowe, who said he was comfortable with the current exchange rate. (Additional reporting by Tokyo markets team)