Dollar Holds Gains on Fed Rate Speculation After May CPI

The dollar held gains against most major peers before the Federal Reserve concludes a two-day meeting after data yesterday enhanced prospects policy makers will raise rates sooner than investors expect.

The Bloomberg Dollar Spot Index closed at the highest in a week yesterday after a measure of U.S. inflation accelerated faster than forecast. The yen was near a one-week low before a report economists forecast will show Japan’s trade deficit widened. New Zealand’s currency pared declines after Auckland-based Cooperative Group Ltd., the world’s largest dairy exporter, said whole milk powder prices rose for the first time in nine auctions.

“The stronger-than-expected consumer-price data dragged U.S. yields and dollar higher,” Estuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp. in New York. “There’s a risk that the market may overreact should there be hawkish undertones from the Fed’s economic forecast and statement with the backdrop that inflation is picking up somewhat.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, was little changed at 1,014.58 as of 8:27 a.m. in Tokyo from yesterday, when it rose 0.3 percent to 1,014.57, the highest close since June 10.

The greenback traded at 102.17 yen from 102.15 yesterday, when it touched 102.24, the highest since June 11. It was unchanged at $1.3547 per euro. New Zealand’s dollar was unchanged at 86.59 U.S. cents from yesterday when it slid 0.2 percent.

U.S. Inflation

Consumer prices in the U.S. rose 2.1 percent in the 12 months through May, the Labor Department data showed yesterday. That was above the 2 percent median estimate of economists surveyed by Bloomberg News.

The Fed is targeting 2 percent inflation, using a Commerce Department gauge that is tied to consumer spending. That measure climbed 1.6 percent in the 12 months through April; May data are due June 26.

The central bank will probably raise its benchmark interest rate faster than money-market investors expect, according to a majority of economists surveyed by Bloomberg News.

Eurodollar futures, the world’s most actively traded short-term interest-rate contract, are underestimating the pace of tightening over the next two years, according to 55 percent of economists in the June 12-16 survey, which drew 56 responses on the question.

Fed officials have reduced monthly buying to $45 billion this year, from $85 billion in 2013, amid signs of growth. Policy makers have kept the target for the benchmark federal funds interest rate at almost zero since December 2008.

Treasuries Signal

Benchmark U.S. 10-year note yields increased six basis points, or 0.06 percentage point, to 2.65 percent yesterday as the cost of living increase in May signaled inflation may move closer to the Fed’s goal.

Japan’s imports probably exceeded exports by 1.19 trillion yen ($11.7 billion) in May, compared to a 811.7 billion yen trade deficit in the previous month, according to the median estimate of economists surveyed by Bloomberg before the Ministry of Finance releases data at 8:50 a.m. in Tokyo today.

The whole-milk powder price index rose 2.4 percent, paring declines since the Feb. 5 auction to 27 percent, Fonterra’s GlobalDairyTrade results showed today.

To contact the reporters on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net

To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net Jonathan Annells, Naoto Hosoda

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