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U.S.
consumer prices recorded their biggest increase in more than
three years in April as gasoline prices and rents rose, while
other data showed housing starts and industrial production
rebounded strongly, adding to the case for an early rate hike.
Rate futures, based on the CME's Fedwatch, moved to price in a
70 percent chance of a rate hike by December, with a 50 percent
chance of a move priced in by September. The chance of a hike in
June was at around 15 percent, up from around 4 percent before
the data was released.
The two-year U.S. Treasury notes yield <US2YT=RR> hit a
three-week high of 0.847 percent.
Also, Atlanta Fed President Dennis Lockhart, viewed as a
centrist on the Federal Reserve board, said he still assumed
there would be two to three rate hikes this year, a view echoed
by San Francisco Fed President John Williams.
The dollar index was up 0.4 percent at 94.99, its highest level
since April 25. The euro slipped against the dollar to a
three-week low of $1.1255 <EUR=> while the U.S. currency was 0.3
percent higher against the yen at 109.50 yen <JPY=>.
"The two-year U.S. yields seem to be breaking their recent
ranges so that is helping the dollar," Yujiro Goto, currency
analyst at Nomura, said. "The Fed officials also sounded a bit
more hawkish about policy."
The focus now turns to the minutes from the last Federal Open
Market Committee later on Wednesday. The minutes are expected to
give investors some context into the discussions around the
outlook for growth and inflation at the April meeting where the
Fed sounded dovish about raising rates.
Earlier, the yen rose against the dollar after data showed
Japan's economy unexpectedly expanded at the fastest pace in a
year in the first quarter, an annualized 1.7 percent, easily
beating forecasts and rebounding from a 1.7 percent contraction
in the previous quarter.
But less bullish aspects of the GDP report kept alive
expectations of more stimulus in coming months.
"Japan's first-quarter GDP looked positive on the headline, but
the nominal growth was slightly disappointing with the GDP
deflator coming in slightly lower than expected," John Hardy,
head of FX strategy at Saxo Bank, said.
Some 80 percent of analysts surveyed by Reuters from May 11-17
said they expected the BOJ to take action, including a
combination of cutting negative interest rates further and
boosting its purchases of government bonds, exchange-traded
funds and corporate bonds.
(additional reporting by Lisa Twaronite; editing by John
Stonestreet and Jane Merriman)
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