FOREX-China's slowing inflation sends dollar higher, UK rate in focus

By Kevin Buckland and Joice Alves

TOKYO/LONDON, May 11 (Reuters) - The dollar rose on Thursday as the Chinese yuan dipped to a two-month low after more evidence of weakness in China's post-COVID recovery clouded the outlook for the global economy.

Sterling edged lower ahead of a key Bank of England meeting, with traders expecting a small hike and looking for signs of further rises in the months ahead.

After sliding on the back of slowing U.S. inflation, which bolstered confidence that the Federal Reserve was done hiking interest rates, the dollar rose against the euro and other major currencies following the release of Chinese data showing consumer inflation almost flatlined last month.

The slowing Chinese inflation, suggesting more stimulus may be to boost a patchy post-COVID economic recovery, came on the foot of data earlier in the week showing an unexpected decline in imports.

The onshore yuan CNY=CFXS slipped as low as 6.9427 per dollar, a level last seen on March 10.

The dollar index =USD measuring the greenback against a basket of six major peers including euro and sterling, rose 0.45% to 101.87.

"The market is trying to assess which economy is going to slow down quicker, and is undecided how to read the latest data," said Rodrigo Catril, senior FX strategist at National Australia Bank.

"U.S. CPI was encouraging, and should be dollar , but China CPI is a reminder of the ongoing issues there."

Money market traders currently lay odds of 5% on a quarter point hike in June, and a 95% probability of a pause. Three quarter-point cuts are priced in by the end of this year. FEDWATCH

The euro EUR=EBS also got a hit from the Chinese data, slipping 0.5% to a three-week low of $1.0924.

Sterling fell 0.5% to $1.2567, retreating from Wednesday's one-year high of $1.2679. The Bank of England releases its policy decision later on Thursday, and is poised for a 12th straight rate hike.

With markets fully pricing in a 25 basis point rate hike, the focus will be on forecasts, especially 2-year consumer price index, and forward guidance, said FX strategist at ING, Francesco Pesole.

"We think markets have got ahead of themselves, and today’s 25bp hike, (with) two members voting for change, may well be the last one in this cycle," he said.

Commodities currency Norwegian Crown NOK=D3 fell 0.7% against the dollar to 10.5750. The Swedish crown SEK=D3 fell 0.7% to 10.2830 per dollar.

Elsewhere, the Aussie dollar AUD=D3 slipped 0.7% to $0.6731, pulling away from Wednesday's 2-1/2-month high of $0.6818.

New Zealand's dollar NZD=D3 fell 0.6% to $0.6332, after briefly touching a three-month high of $0.6384.

(Reporting by Kevin Buckland in Tokyo and Joice Alves in London; Editing by Elaine Hardcastle)

((Joice.alves@thomsonreuters.com;))