(Recasts, updates prices)
* Yen falls broadly as U.S. CPI data boost risk demand
* CPI rises at an unexpectedly slower pace in April
* CPI does not change views Fed on pause
By Lucia Mutikani
NEW YORK, May 14 (Reuters) - The yen fell broadly on
Wednesday as a benign U.S. consumer inflation report for April
raised investors' appetite for risk and was seen giving the
Federal Reserve flexibility to deal with an economic downturn.
The unexpectedly slower increase in the consumer price
index (CPI) briefly caused traders to sell the dollar, but
analysts said it did not alter market views the Fed's
interest-rate-cutting campaign was almost over.
"The market looked at it as a positive for risky assets,
namely that it takes a little bit of stress off the inflation
outlook and gives the Federal Reserve more flexibility in terms
of the economic outlook," said Brian Dolan, chief currency
strategist at Forex.com in Bedminster, New Jersey.
The dollar jumped to a session high of 105.44 yen <JPY=>,
with U.S. stocks surging as worries eased about inflation. It
was last trading at 105.22 yen, up 0.4 percent on the day.
The euro gained 0.4 percent to 162.69 yen <EURJPY=>, while
sterling rose 0.5 percent to 204.67 yen <GBPJPY=>. Against the
yen, the Canadian dollar soared 0.6 percent to 104.89 yen
<CADJPY=>.
RISK APPETITE BACK
"The more benign CPI also led to bonds getting bought back,
bringing yields down. That's what drove the dollar/yen rate and
we're looking at stocks pricing higher, bringing back risk
appetite," said Dolan.
Consumer prices rose by 0.2 percent in April, less than the
0.3 percent gain Wall Street analysts expected. CPI rose 0.3
percent in March.
The dollar erased earlier gains versus the euro, in what
analysts said was a knee-jerk reaction to the CPI report. The
euro was last trading at $1.5460, flat on the day, but off
earlier troughs at $1.5397.
It briefly rose to a session high of $1.5486 <EUR=>.
"The direct nominal rate implications are dollar negative,
and that is the way the market has traded off this number,"
said Alan Raskin, chief international strategist at RBS
Greenwich Capital in Greenwich, Connecticut.
"However, I do not think that this reaction will be
sustained, not least because it is hard to make the case that
having a central bank with greater freedom to respond to growth
weakness is ultimately negative for the currency," he wrote in
a note immediately after the data was released.
Speculation the Fed is done with cutting borrowing costs,
having slashed its key lending rate by 325 basis points to 2
percent since mid-September, has supported the dollar and
analysts said this view had not changed.
U.S. interest rate futures showed the Fed would raise the
benchmark federal funds rate by a quarter point by the end of
the year to 2.25 percent. They were pricing a 92 percent chance
that the central bank would leave rates unchanged next month.
Analysts expected the euro's advance versus the dollar to
remain relatively muted during the session.
"The euro is carving out a top. We ran out of steam earlier
this week at 1.5570. It looks like we are having a broadly
sideways move to the euro. We need to get 1.5570 in order to
signal a move to 1.57," said Marc Chandler, senior currency
strategist at Brown Brothers Harriman in New York.
Sterling slumped to a near three-month low against the
dollar after the Bank of England, in its quarterly inflation
report, said British prices would shoot up this year, which
many believe may delay interest rate cuts.
If British inflation continues to heat up, this will have a
negative impact on the broader economy while keeping the
central bank wary of cutting rates, which often promotes
growth. Sterling last traded flat at $1.9946 <GBP=>.
(Editing by Leslie Adler)
