U.S. stocks dip as inflation risk fans policy bets; USD pauses rally

* U.S. stocks fall on higher-than-expected Sept inflation data

* Oil drops from Monday's multi-year highs

* Dollar dips from Tuesday's one-year high

* U.S., German bond yields edge off highs

By Koh Gui Qing

NEW YORK, Oct 13 (Reuters) - U.S. stocks fell on Wednesday and two-year Treasury yields clung to 18-month highs after data showed inflation ran faster than expected in September, cementing bets that policy tightening by the Federal Reserve is in the offing.

Figures showed the U.S. consumer price index rose 0.4% last month, higher than an expected 0.3%, as Americans paid more for food, rent and a range of other goods, and highlighting the challenges of strained supply chains.

"Persistent inflation suggests we remain in a hot economy, which could prompt the Fed to move sooner," analysts from Bank of America said in a note.

Concerns that an end to the Fed's ultra-loose monetary conditions would undercut support for equities dragged on U.S. shares despite gains in technology stocks, and an encouraging earnings report from JPMorgan Chase & Co JPM.N .

The largest U.S. bank reported third-quarter earnings on Wednesday that beat estimates, thanks to record revenue in some investment banking business and a sunnier economic outlook that allowed it to release money set aside for potential loan losses. JPMorgan stock was down 2.4% by midday.

The Dow Jones Industrial Average .DJI fell 0.25%, the S&P 500 .SPX edged down 0.02%, while the Nasdaq Composite .IXIC added 0.37%.

The pan-European STOXX 600 index .STOXX rose 0.70% and MSCI's gauge of stocks across the globe .MIWD00000PUS gained 0.30%.

Bets on tighter monetary policy flattened the U.S. yield curve.

The two-year Treasury yield US2YT=RR jumped as high to 0.394%, a level last seen since March 2020, before receding to 0.36%. Benchmark 10-year yields US10YT=RR declined to 1.5525%, from 1.58% late on Tuesday.

That left the spread between 10-year and two-year Treasury yields at around 118 basis points, the lowest in over two weeks.

The dollar, which has benefited from bets that tighter U.S. monetary policy would burnish its appeal as a higher-yielding currency, took a breather on Wednesday.

The dollar index =USD fell 0.42% to 94.126 from a one-year high of 94.563 struck the previous day. A softer dollar helped the euro EUR= to jump 0.45% off a near 15-month low to $1.15815.

The Japanese yen JPY=D3 , which has hovered at a three-year low against the dollar, also bounced back, rising 0.18% to 113.38 per dollar.

Oil prices, which have been on a tear, also paused their rally, as some investors questioned whether inflation and other supply chain issues will crimp economic growth and ultimately energy demand.

However, analysts at JPMorgan argued on Wednesday that concerns of accelerating inflation retarding economic growth, and resulting in stagflation, were "overblown."

"Historically, equity markets did well in periods of oil price increases, in particular those periods that followed a crisis," the analysts said. They recommended that investors allocate more cash to shares in the energy, materials, industrial and financial sectors relative to other investments.

U.S. crude CLc1 fell 0.14% to $80.53 per barrel and Brent LCOc1 was at $83.24, down 0.22% on the day.

Gold, usually seen as a hedge against inflation, shone.

Spot gold XAU= added 1.9% to $1,793.97 an ounce. U.S. gold futures GCc1 gained 1.98% to $1,793.10 an ounce.

World FX rates YTD Link
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Additional reporting by Alun John in Hong Kong and Sujata Rao
in London; Editing by Jonathan Oatis and Nick Zieminski

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