* Upside inflation surprise helps lift demand for USD
* Market awaits Fed meeting outcome, Yellen news conference
* Sterling gives up gains after BoE minutes
By Anirban Nag
LONDON, June 18 The dollar held gains against
the yen on Wednesday after higher-than-expected U.S. consumer
prices for May fanned speculation that the Federal Reserve may
inch closer towards raising interest rates.
The U.S. currency also rose against the pound after the
minutes from the Bank of England's last policy meeting proved
not to be as hawkish as many were expecting.
The tone of recent comments from policymakers, including a
U-turn from Governor Mark Carney from dove to hawk on monetary
policy, had bolstered expectations that one of the committee
members may have voted for an increase earlier this month.
Against the yen, the dollar reached a one-week high of
102.31. Sterling fell 0.2 percent to trade at
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.
News of the pick-up in inflation was announced 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 on 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.
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.
BOE VS FED
The BoE is expected to tighten policy before that. BoE chief
Mark Carney's warning last week that markets were too sanguine
about the chances of a 2014 hike had earlier this week sent the
pound soaring past $1.70 for the first time since mid-2009.
But the minutes showed members wanted to see more evidence
of economic slack being absorbed before raising rates. None
voted for a rate rise, quashing market speculation that at least
two members made have done so in the June meeting. That news
sent the pound lower against the dollar and the euro
"Given the lack of hawkish surprises we could see some
profit-taking on long sterling positions," said Valentin
Marinov, currency strategist at Citi. "Sterling/dollar looks
vulnerable ahead of the Fed."
The euro's gains against sterling saw it inch up against the
dollar, trading at $1.3567, up 0.1 percent on the day.
(Editing by Gareth Jones and Keiron Henderson)