* Upside inflation surprise helps lift demand for USD
* Market awaits Fed meeting outcome, Yellen news conference
* Sterling firm near 5-yr high, hawkish BoE minutes expected
By Anirban Nag
LONDON, June 18 The dollar held its gains on
Wednesday after a broad firming on the back of
higher-than-expected U.S. consumer prices for May that has
fanned speculation that the Federal Reserve may inch closer
towards hiking interest rates.
In the European session, the focus will be on the minutes
from the Bank of England's last policy meeting. The tone of
recent comments from policymakers, including Governor Mark
Carney, has bolstered expectations that the minutes will be
hawkish and could push sterling towards the $1.70 mark.
The dollar index last stood at 80.613, having climbed
0.2 percent on Tuesday. Against the yen, the greenback reached a
one-week high of 102.31, while the euro retreated from a
one-week peak hit on Tuesday to trade flat at $1.3550.
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.
The pick-up in inflation came 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 to 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.
"It's been a while since Yellen's last conference. So
markets will be keen to know what she thinks of the economy
after this inflation data," said Takako Masai, executive officer
at Shinsei Bank.
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.
FOCUS ON THE BOE
Sterling was firm against the dollar and the euro before the
release of the BoE minutes. It was up 0.1 percent at $1.6985
, while the euro was slightly weaker at 79.80 pence
The pound crossed the $1.70 level on Monday for the first
time in nearly five years as investors added to bullish bets on
the currency. It gave up some gains on Tuesday after
softer-than-expected UK inflation, but expectations that the BoE
could act before the Fed in raising rates provided support.
Governor Carney surprised investors last Thursday by saying
rates may rise before many were predicting, prompting investors
to bring forward expectations for a first UK rate hike to before
the end of this year from the first quarter of 2015.
"Investors' perception of a monetary policy committee bias
leaning towards earlier removal of policy accommodation should
dominate," said Adam Myers, European head of FX strategy at
"Indeed, coming off the back of an unambiguously hawkish
statement from Governor Carney, we expect even tentative
evidence in the minutes of a looming shift in voter complexion
will benefit sterling as short-term interest rate spreads move
in the currency's favour against both the euro and the dollar."
(additional reporting by Hideyuki Sano in Tokyo; Editing by