FOREX-Dollar falls on rising inflation expectations, higher euro

(New throughout)
By Kate Duguid
NEW YORK, July 14 (Reuters) - The dollar fell in North
American trade on Tuesday as expectations for inflation picked
up slightly and the euro rose on optimism about the possibility
of a European Union stimulus package.
The U.S. dollar index =USD , which measures the safe-haven
greenback against a basket of six rival currencies, was down
0.29% at 96.271.
U.S. consumer prices rebounded by the most in nearly eight
years in June, according to a Labor Department report released
Tuesday. The increase, which ended three straight months of
declines, was driven by a 12.3% jump in gasoline prices after
dropping in the first five months of the year. However, analysts argued that evidence of inflation was
better seen in indicators other than the consumer price index.
"If anything, the CPI print is understating actual inflation
in the U.S. economy," said Karl Schamotta, chief market
strategist at Cambridge Global Payments.
Investors have been buying Treasury Inflation-Protected
Securities (TIPS) to insure against inflation, expected to rise
because of the enormous coronavirus stimulus measures taken by
the Federal Reserve and Treasury Department. The
inflation-adjusted yield on the 10-year TIPS US10YTIP=RR has
been trading with a negative yield since late March and is now
at minus 0.797%, near an all-time low.
"As the economy has recovered a bit, inflation expectations
have rebounded and nominal yields have been capped so that turns
real yields increasingly negative and it adds to the jeopardy
for the dollar," said Daniel Katzive, head of FX strategy North
America at BNP Paribas.
The weaker dollar was also partly attributable to a move
higher in the euro EUR= on hopes the European Union will agree
on a rescue financing package that will limit the economic
damage to the bloc from the coronavirus pandemic. The euro was
up 0.44% at $1.139.
"Market consensus has shifted towards the euro on the
assumption that euro area will suffer less economic damage and
that a large rescue package will be approved," said Schamotta.
He cautioned, however, that "history would suggest that
market participants shouldn't get their hopes too high around a
rescue package. Ultimately, it is likely to be smaller and more
diluted than what is on the table right now."