* Low U.S. inflation dents rate hike expectations
* Dollar falls against euro, hits two-week lows vs yen
* U.S. current account narrows in first quarter
(Recasts, adds comment, updates prices, changes byline)
By Wanfeng Zhou
NEW YORK, June 17 (Reuters) - The dollar fell on Wednesday
after tame U.S. inflation data dampened speculation the Federal
Reserve would raise interest rates anytime soon.
A run-up in equities in recent months and much
better-than-expected numbers on the jobs market have spurred
expectations the U.S. recession might end this year and that
rates will go higher sooner rather than later.
But investors pared back such expectations after a Labor
Department report on Wednesday showed U.S. consumer prices rose
just 0.1 percent month on month in May, but fell over the past
12 months by the most since 1950. See [].
"The latest inflation data has obviously reminded market
participants that inflation is still not as much a worry right
now," said Samarjit Shankar, director of global foreign
exchange strategy at the Bank of New York Mellon in Boston.
"The market has had to scale back its expectations for a
Fed rate hike. That has obviously taken away some element of
support for the dollar."
In mid-afternoon trading in New York, the euro rose 1
percent to $1.3967 <EUR=EBS> on electronic trading platform
EBS.
The dollar fell to roughly two-week lows against the yen to
95.53 <JPY=EBS> and was last at 95.83 yen, down 0.6 percent on
the day.
The ICE Futures' dollar index <.DXY>, which measures the
value of the greenback against a basket of major currencies,
dropped 0.4 percent 80.406.
The expectations on stable interest rates was a relief to
investors worried about a recent surge in Treasury yields,
which has raised fears that higher rates could clip an economic
recovery.
"We're seeing dollar weakness because the idea is that
inflation is not pretty evident right now and that is seen as a
positive in terms of the growth outlook and risk appetite,"
said Brian Dolan, chief currency strategist at Forex.com in
Bedminster, New Jersey.
PREMATURE OPTIMISM
A recovery in the U.S. stock market in afternoon trading
also improved risk appetite in general and reduced safe-haven
demand for the greenback.
Adding to optimism in the currency market was an earlier
report showing the U.S. current account deficit narrowed in the
first quarter. The current account gap of $101.1 billion was
the smallest shortfall since the fourth quarter of 2001.
[]
"The U.S. current account deficit, although higher than
expected, continues to narrow rapidly," Vassili Serebriakov,
currency strategist at Wells Fargo, wrote in a note.
"This implies that the U.S. will need to borrow less from
the rest of the world to finance its trade deficit and is a
long-term positive for the greenback in our view."
Some analysts believe recent optimism about a worldwide
economic rebound was premature, and this was evident in the
price action of commodity currencies such as the Australian and
New Zealand dollars, which have failed a re-test this week of
their highs for the year.
Commodity currencies tend to do well when the global
economic outlook is upbeat on the belief demand for oil and
metals will rise as countries recover from recession.
More and more market participants have started to believe
the rally in these currencies since May could have been a false
dawn.
"Delusion has always been part of the market process. It
always will be," said Jack Crooks, president of FX advisory
firm Black Swan Capital in Florida.
(Additional reporting by Gertrude Chavez-Dreyfuss; Editing by
Chizu Nomiyama)
