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Dollar sinks as US inflation data affirms Fed pause view

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By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – The dollar fell on Tuesday after data showed the smallest annual increase in inflation in more than two years, cementing expectations that the Federal Reserve will announce a pause in interest rate hikes at the end of its two-day meeting on Wednesday.

The dollar index slid 0.4% to 103.15, with the euro rising 0.5% to $1.0810. Against the yen, the dollar was down 0.3% at 139.16 yen.

Data showed that the consumer price index (CPI) edged up 0.1% last month as gasoline prices fell, after increasing 0.4% in April. In the 12 months through May, the CPI climbed 4.0%. That was the smallest year-on-year increase since March 2021 and followed a 4.9% rise in April.

The so-called core CPI increased 0.4% in May, rising by the same margin for the third straight month.

“The numbers are probably enough to see the Fed keep rates on hold this month, as they have suggested,” said Stuart Cole, chief macro economist, at Equiti Capital in London.

“But against this is the fact (that) the core monthly rate remained unchanged at 0.4%, a figure that is too high to be compatible with a 2% inflation target and very much highlighted by the much more modest fall in the annual core inflation rate. In itself, you could easily see the FOMC being able to use this figure to justify another 25-bp rise.

Traders of futures tied to the Fed’s policy rate now see about a 95% chance the U.S. central bank will decide to forgo an 11th straight interest-rate hike and keep the benchmark rate at 5.00% to 5.25% on Wednesday. Before the report, traders saw about a one-in-four chance of a June rate hike.

The rate futures market also trimmed bets on a Fed rate hike in July, overwhelmingly expected in markets before the report.

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Currency bid prices at 9:16AM (1316 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 103.2000 103.5800 -0.36% -0.280% +103.6200 +103.0400

Euro/Dollar $1.0799 $1.0757 +0.40% +0.78% +$1.0824 +$1.0760

Dollar/Yen 139.1800 139.6150 -0.31% +6.16% +139.8300 +139.0100

Euro/Yen 150.29 150.17 +0.08% +7.12% +150.8500 +150.0400

Dollar/Swiss 0.9060 0.9088 -0.31% -2.02% +0.9089 +0.9035

Sterling/Dollar $1.2582 $1.2512 +0.58% +4.06% +$1.2605 +$1.2510

Dollar/Canadian 1.3328 1.3367 -0.30% -1.65% +1.3378 +1.3311

Aussie/Dollar $0.6792 $0.6751 +0.61% -0.36% +$0.6807 +$0.6738

Euro/Swiss 0.9782 0.9777 +0.05% -1.14% +0.9795 +0.9756

Euro/Sterling 0.8580 0.8600 -0.23% -2.99% +0.8612 +0.8580

NZ $0.6165 $0.6124 +0.69% -2.90% +$0.6178 +$0.6104

Dollar/Dollar

Dollar/Norway 10.6850 10.8170 -1.32% +8.76% +10.8070 +10.6740

Euro/Norway 11.5383 11.6189 -0.69% +9.91% +11.6816 +11.5259

Dollar/Sweden 10.7367 10.8120 -0.35% +3.16% +10.8327 +10.7147

Euro/Sweden 11.5948 11.6357 -0.35% +3.99% +11.6509 +11.5882

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Medha Singh in Bengalaru; Editing by Kirsten Donovan)

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