(Adds comment, updates prices, changes byline, dateline; previous LONDON)
* Dollar bounces as Treasury yields hit nine-year highs
* Yields up on report of Trump favoring potential policy hawk
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Gertrude Chavez-Dreyfuss
NEW YORK, Oct 17 (Reuters) - The dollar rose to a one-week high against a basket of currencies on Tuesday on speculation that U.S. President Donald Trump was leaning towards nominating a Federal Reserve head who would be more inclined to raise interest rates at a faster pace.
The greenback was also supported by U.S. two-year Treasury yields hitting nine-year highs on Tuesday. Yields climbed as well on growing expectations that Trump favored Stanford economist John Taylor to head the U.S. central bank.
“Taylor is perceived as more hawkish than Ms.(Janet) Yellen so under his potential tutelage, the central bank might lift borrowing rates more aggressively, which would bolster the dollar’s allure,” said Joe Manimbo, senior marker analyst, at Western Union Business Solutions in Washington.
The dollar index, which measures the greenback against a basket of six major peers, rose on the report hit a one-week high of 93.737.
The index was last up 0.4 percent at 93.695.
MUFG currency economist Lee Hardman, in London, said the bank would “not be surprised” to see an initial jump in the dollar of between 3 percent and 5 percent should Taylor be chosen.
Bloomberg on Monday reported that Trump was impressed with Taylor after meeting with him last week.
Trump’s shortlist also includes Jerome Powell, a Fed governor; Trump’s top economic adviser Gary Cohn; Yellen, whose term expires in February; and Kevin Warsh, a former Fed governor, sources have said, though investors say the chances of Warsh being selected have fallen.
Knocked by a stronger dollar, the euro slipped to a one-week low of $1.1756, having fallen almost 3 percent since hitting a 2-1/2-year high last month. The euro was last down 0.4 percent at $1.1746.
The euro had no reaction to German ZEW economic sentiment data that disappointed expectations in Germany and Europe by coming at 17.6 points, below a forecast of 20.1 points
Markets are wary of chasing the euro lower before a European Central Bank policy meeting next week.
Sterling dropped to $1.32 for the first time in four days on Tuesday, after comments by Bank of England policymakers were interpreted by markets as broadly dovish.
Earlier on Tuesday, official data showed Britain’s inflation rate hit 3 percent, above the BoE’s 2 percent target but in line with expectations.
The greenback was up 0.2 percent at 112.38 yen after rising 0.3 percent late on Monday, when it pulled away from a three-week low of 111.64 yen. (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting Fanny Potkin in London; Editing by Meredith Mazzilli)