Dollar supported before Fed, sterling retreats after BoE minutes

[June 18, 2014]  By Anirban Nag

LONDON (Reuters) - The dollar held gains against the yen on Wednesday after higher-than-expected U.S. consumer prices for May fanned speculation that the Federal Reserve may inch closer towards raising interest rates.

The U.S. currency also rose against the pound after the minutes from the Bank of England's last policy meeting proved not to be as hawkish as many were expecting.

The tone of recent comments from policymakers, including a U-turn from Governor Mark Carney from dove to hawk on monetary policy, had bolstered expectations that one of the committee members may have voted for an increase earlier this month.

Against the yen, the dollar reached a one-week high of 102.31. Sterling fell 0.2 percent to trade at $1.6935.

The U.S. consumer price index rose 0.4 percent in May, double what economists had expected, raising the possibility that a separate inflation gauge watched by the Federal Reserve also pushed higher in May.

News of the pick-up in inflation was announced as Fed policymakers prepared to conclude a two-day meeting. The Fed is widely expected to chop another $10 billion from its monthly bond purchases, but is considered unlikely to make other concrete policy moves.

"We are expecting the Fed to raise their inflation forecasts, but that is more or less expected," said Yujiro Goto, currency analyst at Nomura, London.

"Clearly the momentum is picking up in the U.S. and we are expecting the Fed to become more hawkish in the third quarter. Hence we are recommending buying the dollar against low-yielding currencies like the yen."

The focus will be on Fed Chair Janet Yellen's news conference for any clues on longer-term plans for rates. She is expected to provide a more balanced view on the future path of interest rates, but any hawkish hints could send Treasury yields soaring and help the dollar.

A recent Reuters poll found a majority of Wall Street's top bond firms do not see the Fed raising rates before the second half of next year.

BOE VS FED

The BoE is expected to tighten policy before that. BoE chief Mark Carney's warning last week that markets were too sanguine about the chances of a 2014 hike had earlier this week sent the pound soaring past $1.70 for the first time since mid-2009.

But the minutes showed members wanted to see more evidence of economic slack being absorbed before raising rates. None voted for a rate rise, quashing market speculation that at least two members made have done so in the June meeting. That news sent the pound lower against the dollar and the euro.

"Given the lack of hawkish surprises we could see some profit-taking on long sterling positions," said Valentin Marinov, currency strategist at Citi. "Sterling/dollar looks vulnerable ahead of the Fed."

The euro's gains against sterling saw it inch up against the dollar, trading at $1.3567, up 0.1 percent on the day.

(Editing by Gareth Jones and Keiron Henderson)

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