Dollar hits three-week high on revived Fed rate hike expectations

By Anirban Nag

LONDON (Reuters) - The dollar rose to a three-week high against the euro and a basket of currencies on Wednesday on renewed expectations that the Federal Reserve could raise interest rates soon.

U.S. consumer prices recorded their biggest increase in more than three years in April as gasoline prices and rents rose, while other data showed housing starts and industrial production rebounded strongly, adding to the case for an early rate hike.

U.S. interest rate futures <0#FF:> moved to price in a 70-80 percent chance of a rate hike by December, with a 50 percent chance of a move priced in by September. The chance of a hike in June was at around 12 percent, up from around 5 percent before the inflation data was released.

The two-year U.S. Treasury notes yield hit a three-week high of 0.847 percent.

Furthermore, Atlanta Fed President Dennis Lockhart, viewed as a centrist on the Federal Reserve board, said he still assumed there would be two to three rate hikes this year, a view echoed by San Francisco Fed President John Williams.

The dollar index was up 0.4 percent at 94.897, its highest level since April 25. The euro slipped against the dollar to a three-week low of $1.1271 but rose 0.3 percent against the yen to 109.52 yen .

"The two-year U.S. yields seem to be breaking their recent ranges so that is helping the dollar," said Yujiro Goto, currency analyst at Nomura. "The Fed officials also sounded a bit more hawkish about policy."

Earlier, the yen rose against the dollar after data showed Japan's economy unexpectedly expanded at the fastest pace in a year in the first quarter, an annualised 1.7 percent, easily beating forecasts and rebounding from a 1.7 percent contraction in the previous quarter.

But less bullish aspects of the GDP report kept alive expectations of more stimulus from policymakers in coming months.

"The yen strengthened a bit because growth was stronger than many had expected," said Ayako Sera, market strategist at Sumitomo Trust and Banking. "But looking at the details, there were still some concerning areas, including capital spending."

Some 80 percent of analysts surveyed by Reuters from May 11-17 said they expected the BOJ to take action, including a combination of cutting negative interest rates further and boosting its purchases of government bonds, exchange-traded funds and corporate bonds.

(additional reporting by Lisa Twaronite; editing by John Stonestreet)