Dollar swings up, down to flat after hot U.S. CPI data

  • CPI data sparks rise in Fed tightening expectations
  • Data also boosts interest rate yields
  • FX market takes profits on long dollar positions

NEW YORK, Feb 10 (Reuters) - The dollar swung in choppy trade on Thursday after U.S. consumer prices rose higher than forecast in January, leading markets to boost expectations for the Federal Reserve to aggressively fight soaring inflation.

The consumer price index rose 0.6% from December, the Labor Department said, while in the 12 months through January, CPI jumped 7.5%, the biggest year-on-year gain since February 1982. read more

The data marked the fourth straight month of annual gains in excess of 6% and made St Louis Federal Reserve Bank President James Bullard, a voting member of the Fed's policy-setting committee, "dramatically" more hawkish, he said. read more

The dollar index , a gauge of the greenback's value against six major currencies, initially rose almost 0.5%. It then slumped 0.4% and ended almost flat. It was last up 0.08%.

Higher interest rates typically would lift the dollar, but the market is already sufficiently long dollars, said Bipan Rai, head of FX strategy at CIBC Capital Markets.

"Markets are keen to take profits on those existing long dollar positions," Rai said. "The market has the Fed priced fairly aggressively not just for this year but for next year as well."

Chances of a 50 basis point interest-rate hike rose to more than the likelihood of a 25 basis point increase as was expected before.

The market also considered how other central banks will fight inflation that's on the rise globally, driven especially by rising commodity prices.

"This broader, widespread pricing pressures is a global story," said Edward Moya, senior market analyst at OANDA. "We're starting to see a lot of these other advanced economies are now becoming more aggressive in tackling inflation."

Rates, especially at the short end, soared after the CPI data was released. The two-year U.S. Treasury yield, which typically moves in step with rate expectations, rose 26.1 basis points to 1.609%. The yield on 10-year Treasury notes topped 2% for the first time in 2-1/2 years.

The rates market was questioning the extent of inflation, said Nancy Davis, managing partner and chief investment officer at Quadratic Capital Management LLC.

"I don't think CPI is giving us the whole picture. Given the forward guidance from the Fed, the rates market is priced for disinflation."

Earlier in Europe, the Swedish central bank kept its monetary policy plans broadly unchanged and stressed its view that surging inflation is temporary.

The dovish stance by the Riksbank led the dollar to post its biggest gain among major currencies, leading the Swedish crown to fall 2.01% versus the greenback at 9.31 per dollar.

The euro rose 0.11% to $1.1434.

The Japanese yen weakened 0.43% at 115.99 per dollar to hit a five-week low. The Bank of Japan said it would intervene in markets by offering to buy an unlimited amount of 10-year Japanese government bonds at 0.25%. read more

In cryptocurrencies, Bitcoin last fell 1.11% to $43,985.20.

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Currency bid prices at 3:53PM (2053 GMT)

Reporting by Herbert Lash; Editing by Edmund Blair, Alexandra Hudson, Mark Heinrich and Diane Craft

Our Standards: The Thomson Reuters Trust Principles.