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Dollar firm, stocks stall

Wednesday, June 18 08:04:25

The dollar held firm with higher Treasury yields on Wednesday after a surprisingly high reading for U.S. inflation threatened to give a hawkish tilt to the Federal Reserve's policy outlook later in the session.

The risk was more than enough to keep most Asian share markets on the defensive with MSCI's broadest index of Asia-Pacific shares outside Japan off 0.2 percent.

Japan's Nikkei stood out with a rise of 0.93 percent as a softer yen helped offset disappointing trade numbers.

Data out of China showed home prices there fell in May for the first time in two years, but analysts were divided on whether this was a welcome cool down in an overheated sector or the start of something more serious.

The U.S. Fed's two-day policy meeting ends with a statement at 1800 GMT, followed half an hour later by a news conference with Chair Janet Yellen. The central bank will also provide its latest forecasts for growth, inflation and interest rates.

While economic growth has disappointed so far this year, signs of an acceleration in inflation could bring forward the day when the Fed might consider hiking rates.

The U.S. consumer price index increased 0.4 percent in May, twice the gain expected, driven in large part by rising airfares and hotel rates. Core inflation rose 0.3 percent in the biggest monthly rise since late 2009.

Treasuries also suffered, with yields on two-year paper ending at their highest in nine months at 0.49 percent . That in turn widened their premium over German yields to 44 basis points, the most since 2007, and gave the dollar a lift against the euro.

The euro faded to $1.3542, from a high of $1.3587, as the outlook for U.S. rates contrasted with the European Central Bank's recent decision to ease policy yet further.

The dollar was also up at 102.25 yen and edging away from last week's trough of 101.60.

Equity markets in the U.S. took the inflation news surprisingly well, perhaps in part because it helped assuage fears the economy was drifting toward Japan-like deflation.

The S&P 500 ended near its record high after three days of gains, led by a 1 percent rise in the S&P Financial index . The Dow rose 0.16 percent, while the S&P 500 gained 0.22 percent and the Nasdaq 0.37 percent. (Reuters)