(Adds quotes, update prices)
By Veronica Brown
LONDON, May 14 (Reuters) - Stocks rallied and the dollar
lost ground on Wednesday after U.S. consumer prices rose less
than expected, injecting a hint of doubt into expectations that
the Federal Reserve will pause its cycle of interest rate cuts.
U.S. consumer prices rose a smaller-than-expected 0.2
percent in April as energy prices held steady, a Labor
Department report showed.
The rise was less than the 0.3 percent gain Wall Street
analysts polled by Reuters were expecting after a 0.3 percent
advance in March. Core prices, which exclude volatile food and
energy costs, were up just 0.1 percent, half the increase
analysts had forecast.
The CPI reading led U.S. interest rate futures to show
briefly a 10 percent chance of a 25 basis point rate cut at the
next Fed meeting in June, following 325 basis points' worth of
cuts since September aimed at helping to offset damage to U.S.
growth caused by the credit crunch.
"It takes a little bit of pressure off the Federal Reserve
as some hope that inflation pressures are contained. It's
bearish for the U.S. dollar. It allows the Fed to do what it
feels it has to do to sustain growth later this year," said
David Watt, senior currency strategist at RBC Capital
Markets in Toronto.
U.S. stocks rose at the market open. The Dow Jones
industrial average <> was up 39.49 points, or 0.31 percent,
at 12,871.67. The Standard & Poor's 500 Index <.SPX> was up 5.22
points, or 0.37 percent, at 1,408.26.
The dollar lost its earlier gains against the euro <EUR=>,
leaving the common currency steady on the day at $1.5463, while
the FTSEurofirst 300 index of top European shares <> was
up 0.4 percent at 1,352.27 points.
Benchmark 10-year notes <US10YT=RR> were last up 6/32 in
price for a yield of 3.90 percent, down from 3.91 percent late
Tuesday. Shortly before the government released the CPI data,
they were down 12/32 in price for a 3.96 percent yield.
HEADWINDS
The dollar's losses gave a brief lift to gold, which is
often seen as a hedge against inflationary pressures, while oil
<CLc1> remained weaker after hitting a record $126.98 a barrel
this week.
While some people were hoping that U.S. inflation pressures
had been contained, the picture in the UK looked more
complicated after a Bank of England report highlighted the
dilemma facing policymakers charged with navigating through
rising prices and slower growth.
Sterling hit a three month low versus the dollar after the
BoE's quarterly report showed inflation staying above target for
some time to come and economic growth slowing sharply.
Analysts say the two conflicting forces could limit the
scope for future interest rate cuts, potentially further hurting
the economy and thus sterling.
"Overall the report makes very bearish reading really as far
as sterling is concerned with the higher inflation and the weak
growth picture as well," said Ian Stannard, senior FX strategist
at BNP Paribas.
Sterling fell as low as $1.9366 <GBP=>, its weakest since
Feb. 20. A move below $1.9335 would take it beyond this year's
lows, to levels not seen since March 2007.
(Reporting by Veronica Brown; Editing by David Stamp)
