Weak US inflation, retail sales data dim rate hike prospects

Dollar treads water, US inflation data awaited for Fed direction

NEW YORK, July 14 (Reuters) - The dollar fell against a basket of major currencies on Friday, after weaker-than-forecast data on consumer prices and retail sales in June raised doubts about USA economic growth and whether the Federal Reserve would raise interest rates again in 2017.

The benchmark 10-year Treasury yield TMUBMUSD10Y, -2.05% fell 5.1 basis points to 2.296%. The less volatile 12-month CPI measure slowed three-tenths from May to 1.6 per cent, continuing a sharp decline since February.

Signs of a pickup in US inflation could reinforce views that the Fed would hike interest rates again sooner rather than later, which would lift Treasury yields and the dollar.

Following the surprise rise in June producer prices yesterday, today's consumer prices, on the other hand, came out softer than expected over the same period.

Inflation in June came in flat, a sign that consumer prices had trouble sustaining its upward momentum.

The dollar index, which tracks the greenback against six major rivals, was down 0.6 percent to 95.152 after earlier falling to 95.132, its lowest since September 2016.

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Economists polled by MarketWatch had forecast a 0.1% increase in the CPI.

As a reminder, the FOMC has a target of 2.0% to 2.5% for annualized inflation. In particular, core retail sales which exclude automobiles, declined by 0.2% instead of posting an equivalent percentage improvement that was expected by analysts. For the April-June period, sales were up 3.8 per cent over the same quarter previous year. "They don't seem to want to spend money", said John Bredemus, investment strategist for Allianz Investment Management. Undoubtedly, the rock-bottom levels for the crude oil market is dragging down general inflation, which is indirectly affecting consumer prices, as well. He said it was hard to find a "positive way to spin the data".

The University of MI survey will provide its latest snapshot of consumer confidence at 10 a.m.

"If there's evidence that there is broad-based weakening in inflation", she said, "I think the Fed will pay attention". For instance, governor Lael Brainard has signaled a willingness to get going on the balance sheet before seeing stronger price gains, but suggested she might be hesitant to move again on rates.

"Most senior Fed officials had believed the slowdown in inflation was temporary, but now they have been forced to reassess their views", MarketWatch said. Some market participants took this as a small concession that the weakening economic data may not just be transitory.

Meanwhile, Chicago Fed President Charles Evans, also a voting member of the rate-setting Federal Open Market Committee, will post his speech originally intended for Thursday at 1 p.m.

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