Yen higher, dollar squeezed as US inflation eased to its slowest pace

The dollar nursed losses and the yen rose on Thursday after US core inflation eased to its slowest pace in three years, pulling forward expectations for rate cuts in the world's biggest economy.

Core US inflation slowed to an annualised 3.6 per cent in April, Wednesday's data showed. That was in line with market expectations but, along with flat retail sales figures, suggested that conditions for rate cuts are falling into place.

The battered yen extended a rebound into a second session, rallying about 0.6 per cent to its strongest in two weeks at 153.6 to the dollar as the gap between US and Japanese yields narrowed.

Other currencies touched multi-month highs against the greenback before steadying. The Australian dollar, which had surged 1 per cent on Wednesday, hit a four-month high at $0.6714 but then paused after an unexpected rise in Australian unemployment.

It was last at $0.6685 as traders priced out any risk of a further rate hike in Australia. [AUD/]

The euro edged up to a two-month high at $1.0895. The New Zealand dollar also hit a two-month high at $0.6140. Sterling made a one-month high at $1.27.

Analysts said any further selling of the dollar probably depended on how US and other policymakers react to the data readings. If the Fed chooses to keep waiting, for example, the Bank of Japan may be hiking rates before US rate cuts begin.

"160 (yen) probably was the top for the dollar for the time being, if not for the rest of the year," said Naka Matsuzawa, chief macro strategist at Nomura in Tokyo.

But for it to go down below 150 he said markets would need to see a clearer signal from the Fed of actual rate cuts starting.

Softer-than-expected US retail sales figures, which were flat last month instead of the 0.4 per cent gain that economists had forecast, reinforced the impression the economy was slowing.

The data drove a rally in Treasuries and, combined with selling in Japanese bonds, the gap between US and Japanese 10-year yields has narrowed nearly 20 basis points this week - on track for the largest weekly move of the year so far.

The Japanese economy however, contracted more than expected in the first quarter, complicating the challenge for policymakers as they look to raise rates from near-zero levels.

The US dollar index made its heaviest one-day percentage drop for the year so far on Wednesday, falling 0.75 per cent and through its 200-day moving average. It touched a five-week low of 104.07 in Asia on Thursday and was last at 104.22.

China's yuan rallied slightly to 7.2070 per dollar. Bitcoin regained a footing above its 100-day moving average and touched a three-week high of $66,695.