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Dollar, bond yields dip amid benign U.S. inflation data

15 July 2017

The dollar weakened and government bond yields fell to multi-week lows on Friday after a benign reading of USA inflation in June and soft retail demand raised doubts the Federal Reserve would increase interest rates later this year.

For June, the BLS set the inflation index at 244.955, an increase of 0.09% over the May number.

Alan Clarke, head of Scotiabank's European fixed income strategy, said food prices and air fares likely made the most notable gains last month, alongside smaller increases in alcohol costs, restaurant prices and package holidays. The core CPI increased 1.7% year-on-year - still short of the Fed's 2% target.

Investors are awaiting a host of US economic indicators, including inflation, retail sales and industrial production for June later in the session for more insight into how the Fed might proceed with monetary policy tightening this year. The Commerce Department said on Friday retail sales fell 0.2 percent last month.

Janet Yellen told USA lawmakers anxious about the health of the economy past year that expansions do not die of old age. Weak retail sales, meanwhile, signals that consumers have not responded to higher wage gains.

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Industrial production rose for the fifth straight month in June, increasing 0.4 per cent on a continued rise in oil and gas drilling and coal mining.

The annualised rate of inflation in several CPI components over the past three months showed declines of 4.9 percent in apparel, 5.5 percent in used cars and trucks and 4.1 percent in professional services, said Heidi Learner, chief economist in NY for brokerage Savills Studley, a unit of Savills Plc SVS.L .

"This cements the weaker trend in the dollar and lower United States yields and I think this story has got legs", Franulovich said.

Before this week, investors had been selling bonds, driven largely by anxiety that an improving global economy may allow major central banks outside of the scale back on stimulus efforts that have helped lift asset prices since the financial crisis.

The Fed has raised rates twice this year and is expected to do so once more, though probably not until December.

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The dollar pulled up 0.1 percent to 113.4 yen early on Friday, narrowing losses for the week to 0.4 percent.

Dow Jones closed up by 0.41 percent, S&P 500 ended up 0.47 percent, Nasdaq finished the day up by 0.59 percent.

The unemployment rate is at 4.4 percent, near a 16-year low. It rose as high as $1.3088 after a closely watched survey of USA consumer sentiment came in worse than forecast at 1400 GMT and was also half a percent higher at 87.63 pence per euro.

The latest data is likely to trigger fresh doubts surrounding the inflation outlook and create renewed uncertainty surrounding potential further rate increases, although the Fed will see the steady rate of services-sector inflation as justifying their policy. The yield on the 30-year bond, or the long bond, TMUBMUSD30Y, -0.85% fell 3.1 basis points to 2.888%. It was at $1.145 Friday.

The euro gained 0.64 per cent to US$1.468 (RM6.28).

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Dollar, bond yields dip amid benign U.S. inflation data