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Wednesday May 14, 2008 - 11:26:12 GMT
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FOREX NEWS-Dollar gains before US CPI, sterling slumps

Wed May 14, 2008 7:18am EDT

(Changes byline, adds quotes, updates prices)

By Naomi Tajitsu

LONDON, May 14 (Reuters) - The dollar rose broadly on Wednesday, building on gains made after robust U.S. retail data as more investors adopted the view that the Federal Reserve may be done with cutting interest rates, at least for now.

Sterling slumped to a near three-month low against the dollar after the Bank of England in its quarterly inflation report said that UK prices would shoot up this year, which many believe may delay interest rate cuts. Click on [ID:nBOE001421]

Inflation pressures remained a main theme in the market, and investors awaited the April U.S. consumer price index at 1230 GMT to glean more insight into whether the Fed will take a breather from aggressive rate cuts while it gauges the impact of past cuts on the broader economy.

U.S. interest rate futures showed the market has begun to price in the possibility that the Fed may even raise borrowing costs at the end of the year FEDWATCH, pushing Treasury yields higher and boosting the appeal of U.S. debt.

"An increase in U.S. bond yields reflects two things: a market perception that the Fed is on hold for now and the feeling that previous rate reductions together with current fiscal stimulus ... will help the U.S. economy," said Neil MacKinnon, chief economist at London-based hedge fund ECU Group.

"Both factors will help support the dollar."

The 10-year Treasury yield jumped near 4 percent, its highest since the start of the year <US10YT=RR>.

The dollar was also bolstered after data on Tuesday showed U.S. retail sales, excluding those in the hard-pressed auto sector, rose 0.5 percent in April, more than double economists' forecasts, and suggesting that consumer demand was improving.

By 1054 GMT, the dollar was up 0.4 percent at 105.18 yen <JPY=>, edging closer to a two-month high of 105.69 yen touched at the start of the month.

The euro fell 0.2 percent to session lows around $1.5425 <EUR=>, with traders citing strong dollar buying versus Asian currencies as a factor dragging the single currency down.

The euro is now down nearly 4 percent from record highs hit last month at $1.6018, according to Reuters data.

Against a basket of six major currencies, the dollar was up 0.2 percent at 73.466 .DXY.

Sterling stumbled to $1.9366 <GBP=>, its weakest since late February and approaching its lowest level of the year around $1.9335.

The UK currency was pressured on concerns that ongoing signs that British inflation continues to heat up will have a negative impact on the broader economy, while keeping the central bank wary of cutting rates, which often promotes growth.

BoE Governor Mervyn King on Wednesday said that he likely would soon be forced to write several letters to the government to explain why inflation was more than a point above the central bank's 2 percent target -- as required by the BoE's remit.

The BoE has cut rates by 75 basis points since December, to 5 percent, and some in the market have cast doubt on whether a cut in June will be possible given a surge in consumer prices.


The greenback, which has rallied on speculation the Fed is done with cutting borrowing costs after slashing by 325 basis points since September, also garnered support from Fed comments emphasising inflation concerns.

Cleveland Fed President Sandra Pianalto called inflation "a key risk", while Dallas Fed President Richard Fisher said it was unclear whether a slowing U.S. economy would be enough to alleviate cost pressures. [ID:nN13441127]

"From the comments we've seen from most of the Fed officials, it feels like they want to indicate that we're at or very close to the bottom of where Fed funds need to go," Calyon currency strategist Daragh Maher said.

Economists in a Reuters survey expect a median 0.3 percent gain in the CPI and an annual rise of 2.4 percent in core CPI excluding food and energy items. (Additional reporting by Veronica Brown; editing by Stephen Nisbet)

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