* Dollar and Treasury yields higher as US inflation picks up
* CPI surprise adds to risk of hawkish turn at Fed meeting
* Share markets hold their nerve for now, Nikkei moves ahead
By Wayne Cole
SYDNEY, June 18 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
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.
"At a minimum it emboldens the hawks, even if Yellen will
put a brave face on this and continue to speak about
considerable spare capacity in the labour market," said Alan
Ruskin, global head of G10 currency strategy at Deutsche Bank.
As a result, futures contracts that aim to predict the path
of the Fed funds rate <0#FF:> sold off sharply as investors
priced in an earlier hike.
The contract for June 2015, for instance, slid to its lowest
in over two months to 99.655, implying a rate of 0.345 percent.
Currently, the effective funds rate is around 0.10 percent.
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 (CPI) data is a material positive event for the US
dollar, with emerging market and commodity currencies for the
moment most vulnerable," added Ruskin.
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.
In commodity markets, the turmoil in Iraq kept oil prices
supported. U.S. light crude added 22 cents to $106.58,
while Brent oil eased 18 cents to $113.27 per barrel.
Spot gold slipped to $1,268.11 an ounce having run
into profit-taking at Monday peak of $1,284.85.
(Editing by Eric Meijer & Shri Navaratnam)