The dollar bounced back from a one-week low against the euro on Wednesday as markets cooled down after a sharp sell-off in the wake of Tuesday's dovish Federal Reserve comments and U.S. inflation data. Investors had pushed the dollar down one cent after growth in core U.S. consumer prices came out smaller than markets had bet and Fed Chairman Alan Greenspan sounded more dovish on the threat of inflation than previously. The data and Greenspan's comments dashed growing speculation that the Fed may raise rates by half a percentage point on June 30 instead of the widely expected quarter-point hike. But the dollar's losses were trimmed on Wednesday after the currency appeared to find support on technical trading charts. "The dollar sold off quite heavily yesterday," said Peter Wuyts, market analyst at KBC in Brussels. "That downward correction was quite substantial, especially since inflation was not that far off consensus. The picture for the dollar remains unclear and we are in the middle of a range." At 0955 GMT, the dollar was up 0.67 percent on the day at $1.2078 per euro . Earlier it matched Tuesday's one-week low of $1.2168.
"It's a short-term market - we tried the downside of the dollar, then we just came back up," said a trader at a U.S. bank in London. The dollar was also up a third of a percent versus the yen at 109.83 . It gained one percent on the Swiss franc to 1.2631 , partially due to dimming expectations for a Swiss rate rise this week. The Swiss National Bank issues its quarterly policy review on Thursday. The Fed meets next on June 29-30 and many investors expect U.S. rates to rise from a 1958 low of 1 percent.
RETURN OF INFLATION
Inflation is closely watched around the world now as global economic recovery gathers pace and oil prices stay high, potentially leading to higher consumer prices. Earlier this month several Fed officials, including Greenspan, voiced concerns over rising inflationary pressures, boosting the dollar. But the Fed chairman said during his 5th nomination hearings on Tuesday that inflation was unlikely to be a serious concern in the near future and that interest rate rises were likely to be gradual. His comments came after the U.S. consumer price index (CPI) for May showed a rise of 0.6 percent, slightly above economists' forecasts for a 0.4 percent increase, but not enough to satisfy dollar bulls who had hoped for a stronger reading. Closely-watched core inflation, which strips out volatile food and energy prices, rose by 0.2 percent. It was in line with forecasts but analysts said the wide gap between headline inflation and core price growth signalled moderate overall inflationary pressures in the economy. Meanwhile in Europe, annual inflation was confirmed at 2.5 percent in May, its highest level since March 2002 and well above the European Central Bank's goal of keeping inflation below but close to two percent. Core euro zone inflation stood at 2.1 percent year-on-year, unchanged from April. Data showing shortening dole queues in Britain also boosted the pound by keeping speculation about new rate hikes from the Bank of England bubbling.
Later in the day, ECB President Jean-Claude Trichet holds a news conference. U.S. industrial production is due at 1315 GMT. It is expected to have risen in May, driven by a steadily accelerating factory sector and improved capacity utilisation. According to a poll, production is seen up 0.8 percent. Atlanta Fed President Jack Guynn is due to speak at 1800 GMT, and Federal Reserve Bank of Richmond President Alfred Broaddus speaks at 2215 GMT.///