Dollar drops, stocks gain before US inflation data

THE dollar weakened, stocks rose, and Treasury yields dipped on expectations slowing US inflation will erode the case for more rate hikes.

A gauge of the greenback dropped to the lowest since April as traders focus on US consumer price data due later Wednesday, with a Bloomberg survey showing expectations for both core and headline inflation continuing to moderate in the face of the Federal Reserve’s monetary policy onslaught.

The Stoxx Europe 600 index advanced for a fourth day, with bank shares outperforming after the UK’s eight largest lenders all passed the Bank of England’s latest stress test.

Virgin Money UK Plc surged more than 5 percent and Lloyds Banking

Group Plc. climbed 2.5 percent. Travel and leisure shares fell, led by Air France-KLM and IAG after Deutsche Bank cut its recommendations on the stocks.

Futures on the S&P 500 and Nasdaq 100 edged higher after Tuesday’s solid gains.

A trend of slowing inflation in the US could be pivotal for policy makers in the months ahead, according to Bloomberg Economics. Officials have warned in recent weeks that higher rates will be needed to ensure price growth slows to the Fed’s 2 percent target, and a 25-basispoint increase is all but penciled for July 26 after the pause in June. The policy path after that remains an open question.

“Both US and European equity markets have decoupled from the inflation narrative in recent months and this makes sense given the wellbehaved decline in US inflation, which should continue with the June release today,” said Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital. “However, an upside surprise in core inflation could catch investors off guard and lead to more softness in markets.”

Across Asia, shares were a mixed bag, with slides in Japan and increases in Australia and India. Hong Kong stocks rose after data showed a strong credit expansion in the world’s second-largest economy. Chinese tech firms gained for a third day as unusual praise from the nation’s top economic planner and news of a meeting between officials and key companies stoked optimism over policy support for the sector.

In contrast to the gains in Hong Kong, China’s domestic benchmark CSI 300 index shed 0.4 percent, an indication that local investors would like to see stronger stimulus to salvage an ailing economy.

Also in the spotlight is the yen’s advancement beyond the key 140 level partly on speculation that the Bank of Japan will tweak policy later this month.

Elsewhere, the offshore yuan gained for a fifth day against the greenback, after China’s central bank extended support for the currency via a stronger-than-expected daily reference exchange rate.