Yen higher, dollar squeezed as US inflation ebbs
Updates prices
By Tom Westbrook
SINGAPORE, May 16 (Reuters) -The dollar nursed losses and the yen rose on Thursday after U.S. core inflation eased to its slowest pace in three years, pulling forward expectations for rate cuts in the world's biggest economy.
Core U.S. inflation slowed to an annualised 3.6% in April, Wednesday's data showed. That was in line with market expectations but, along with flat retail sales figures, suggested that conditions for rate cuts are falling into place.
The battered yen extended a rebound into a second session, rallying about 0.6% to its strongest in two weeks at 153.6 to the dollar as the gap between U.S. and Japanese yields narrowed.
Other currencies touched multi-month highs against the greenback before steadying. The Australian dollar, which had surged 1% on Wednesday, hit a four-month high at $0.6714 but then paused after an unexpected rise in Australian unemployment.
It was last at $0.6685 AUD=D3 as traders priced out any risk of a further rate hike in Australia. AUD/
The euro EUR=EBS edged up to a two-month high at $1.0895. The New Zealand dollar NZD=D3 also hit a two-month high at $0.6140. Sterling GBP=D3 made a one-month high at $1.27.
Analysts said any further selling of the dollar probably depended on how U.S. and other policymakers react to the data readings. If the Fed chooses to keep waiting, for example, the Bank of Japan may be hiking rates before U.S. rate cuts begin.
"160 (yen) probably was the top for the dollar for the time being, if not for the rest of the year," said Naka Matsuzawa, chief macro strategist at Nomura in Tokyo.
But for it to go down below 150 he said markets would need to see a clearer signal from the Fed of actual rate cuts starting.
Softer-than-expected U.S. retail sales figures, which were flat last month instead of the 0.4% gain that economists had forecast, reinforced the impression the economy was slowing.
The data drove a rally in Treasuries and, combined with selling in Japanese bonds, the gap between U.S. and Japanese 10-year yields JP10US10=RR has narrowed nearly 20 basis points this week - on track for the largest weekly move of the year so far.
The Japanese economy however, contracted more than expected in the first quarter, complicating the challenge for policymakers as they look to raise rates from near-zero levels.
The U.S. dollar index =USD made its heaviest one-day percentage drop for the year so far on Wednesday, falling 0.75% and through its 200-day moving average. It touched a five-week low of 104.07 in Asia on Thursday and was last at 104.22.
China's yuan CNY=CFXS rallied slightly to 7.2070 per dollar. Bitcoin BTC= regained a footing above its 100-day moving average and touched a three-week high of $66,695.
World FX rates https://tmsnrt.rs/2RBWI5E
Reporting by Tom Westbrook; Editing by Shri Navaratnam, Christopher Cushing and Tom Hogue
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