(Adds new comment, details on ECB, BOJ rate meetings) * U.S. headline CPI edges up 0.1% in May, while core rose 0.4% * Rates markets raise odds of Fed pause on Wednesday to 93% * ECB seen hiking rates in June and July * BOJ will keep ultra-easy stance * Sterling hits five-week high vs dollar * China’s yuan falls to six-month low vs greenback By Gertrude Chavez-Dreyfuss NEW YORK, June 13 (Reuters) – The dollar dropped to a three-week low on Tuesday on news of the smallest annual increase in inflation in more than two years, cementing expectations that the Federal Reserve will pause interest rate hikes at its two-day meeting ending on Wednesday. The dollar index slid to as low as 103.04 following the data, and was last down 0.3% at 103.21 . The euro rose 0.4% to $1.0795, after climbing to $1.0824, its highest since May 22. Against the yen, the dollar rose 0.2% to 139.91 yen. The U.S. consumer price index (CPI) edged up 0.1% last month as gasoline prices fell, after increasing 0.4% in April. In the 12 months to May, the CPI climbed 4.0%, the smallest year-on-year increase since March 2021, after rising 4.9% in April. So-called core CPI increased 0.4% in May, however, the same percentage rise for the third straight month. “Today’s report likely does not change much for tomorrow’s Federal Open Market Committee decision, and our expectations have not changed: we expect the FOMC to keep interest rates unchanged, while signaling that market participants should not interpret this as the end of the hiking cycle,” wrote Tiffany Wilding, managing director and economist at PIMCO, in a research note. “Officials with a hawkish bias can point to 3-month annualized core CPI now running at 5%, very little progress across the first half of the year. However, the gradual improvement in many of the ‘stickier’ parts of inflation, like shelter, suggest that officials can continue to forecast improvement ahead.” Traders of futures tied to the Fed’s policy rate now expect a roughly 93% 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 a 75% chance of a June rate increase. The rate futures market, however, trimmed bets on a Fed hike in July to a 64% probability, down from more than 70% late on Monday. The European Central Bank’s rate decision is up next on Thursday, with markets pricing in a 25 basis-point hike and another in July before a pause for the rest of the year. The Bank of Japan, due to announce a monetary policy decision on Friday, is expected to maintain its ultra-dovish stance and yield curve control settings. Elsewhere, sterling jumped on Tuesday after employment data came in much stronger than expected, with wages rising sharply, adding to inflation concerns. The pound hit a five-week high of $1.2621 against the dollar and was last up 0.9% at $1.2618 as traders bet the Bank of England would have to raise rates further than previously expected. In Asia, China’s yuan fell to a six-month low after the central bank lowered a short-term lending rate for the first time in 10 months, in a bid to restore market confidence and prop up its stalling post-pandemic recovery. The onshore yuan bottomed at 7.168 per dollar, its lowest since November, and last traded at 7.158, down 0.2%. Its offshore counterpart weakened to a new six-month low of 7.178, before paring losses slightly. ======================================================== Currency bid prices at 12:59PM (1659 GMT) Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid Previous Change Session Dollar index 103.1600 103.5800 -0.40% -0.319% +103.6200 +103.0400 Euro/Dollar $1.0803 $1.0757 +0.43% +0.82% +$1.0824 +$1.0760 Dollar/Yen 139.8850 139.6150 +0.20% +6.70% +140.1100 +139.0100 Euro/Yen 151.11 150.17 +0.63% +7.70% +151.2400 +150.0400 Dollar/Swiss 0.9037 0.9088 -0.56% -2.27% +0.9089 +0.9035 Sterling/Dollar $1.2624 $1.2512 +0.90% +4.39% +$1.2625 +$1.2510 Dollar/Canadian 1.3290 1.3367 -0.57% -1.91% +1.3378 +1.3287 Aussie/Dollar $0.6786 $0.6751 +0.53% -0.44% +$0.6807 +$0.6738 Euro/Swiss 0.9760 0.9777 -0.17% -1.36% +0.9795 +0.9755 Euro/Sterling 0.8555 0.8600 -0.52% -3.27% +0.8612 +0.8554 NZ $0.6159 $0.6124 +0.55% -3.03% +$0.6178 +$0.6104 Dollar/Dollar Dollar/Norway 10.6310 10.8170 -1.65% +8.40% +10.8070 +10.6320 Euro/Norway 11.4863 11.6189 -1.14% +9.42% +11.6816 +11.4843 Dollar/Sweden 10.6986 10.8120 -0.82% +2.80% +10.8327 +10.7010 Euro/Sweden 11.5400 11.6357 -0.82% +3.50% +11.6509 +11.5480 (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Harry Robertson in London and Rae Wee in Singapore; Editing by Kirsten Donovan and Richard Chang)
