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FOREX-Dollar rally pauses as Fed plays calm hand on inflation surprise

By Hideyuki Sano

TOKYO, May 14 (Reuters) – The dollar took a breather on Friday but looks set to post weekly gains against a basket of currencies as investors weighed the risk of U.S.

inflation rising faster than expected and prodding the Federal Reserve to hike interest rates sooner.

A strong reading on U.S. wholesale prices and jobless claims on Thursday failed to spark a renewed uptick in Treasury yields, which some traders put down to the market already pricing in a degree of inflation worries.

Moreover, the Federal Reserve has been sticking to its script that its stimulus will be in place for some time to support the economy, with officials viewing a spike in inflation as transitory.

“We’ve seen some surprise economic data. But because the Fed hasn’t budged an inch in its stance, markets won’t be able to keep talking up the inflation story,” said Masaru Ishibashi, joint general manager of trading at Sumitomo Mitsui Bank.

In mid-Friday Asian trade, the dollar index stood at 90.707 , sitting on a gain of 0.5% so far this week and keeping some distance from its 2-1/2-month low of 89.979 set on Tuesday.

Against the yen, the dollar stood at 109.50 yen, below Thursday’s one-month high of 109.785.

The euro was fetching $1.2076, holding above Thursday’s low of $1.20515 while the British pound changed hands at $1.4047.

The U.S.

producer price index rose 0.6% in April after surging 1.0% in March. In the 12 months through April, the PPI shot up 6.2%. That was the biggest year-on-year rise since the series was revamped in 2010 and followed a 4.2% jump in March.

A separate report showed the number of Americans filing new claims for unemployment benefits dropped to a 14-month low of 473,000.

Strong data, coming after a stunning jump in consumer inflation announced on Wednesday, added to the evidence inflationary pressure is building up in the United States as vaccine rollouts prompts economic normalisation.

On Thursday, however, U.S.

bond yields dipped, with the 10-year Treasuries yield slipping to 1.651% after hitting a five-week high of 1.707%.

All the same, given the U.S. economic normalisation is gathering steam, market players say underlying inflation concerns will remain for now.

“Inflation will remain a big theme for markets in coming few months. The Fed says it will be transitory but markets are asking ‘what if it turns out not to be transitory,” said Yukio Ishizuki, senior strategist at Daiwa Securities.

Worries about an over-heated economy could intensify especually if the Biden administration manages to press ahead with its $4.1 trillion jobs and infrastructure plan.

“People think it will be scaled back considerably by Republicans. But if can get a deal close to a full amount, that would get a lot of people nervous,” said Seiya Nakajima, chief economist at Office Niwa.

In crypto currencies, bitcoin flirted with 2-1/2-month lows after Tesla Inc chief Elon Musk reversed his stance on accepting the digital currency and on news of a U.S.

probe into Chuo cha binance, one of the world’s biggest cryptocurrency exchanges.

The world’s biggest cryptocurrency last traded at $49,155 , having fallen to as low as $45,700 on Thursday, its lowest level since March 1.

The second-biggest cryptocurrency ether was firmer at $3,783.5, though it was still off a record high of $4,380.64 hit on Wednesday.

Also moving in the opposite direction from bitcoin, dogecoin, a relatively new coin promoted by Musk, jumped as much as 20% after he said he was involved in work to improve the token’s transaction efficiency.

(Reporting by Hideyuki Sano Editing by Shri Navaratnam)

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