FOREX-US dollar sinks as inflation cools; euro surges

By Gertrude Chavez-Dreyfuss and Stefano Rebaudo

NEW YORK/MILAN, June 12 (Reuters) - The dollar slumped on Thursday as weaker-than-expected inflation data suggested the Federal Reserve could resume cutting interest rates sooner rather than later, while the safe-haven yen and Swiss franc benefited from rising Mideast tensions.

The euro soared to its highest in almost four years against the dollar. The greenback also fell to a two-month low versus the Swiss franc and a roughly one-week low against the yen.

Data showed U.S. producer prices increased less than expected in May , restrained by lower costs for services like air fares, further undermining the dollar. Wednesday's data also indicated cooling inflation, with a lower-than-expected rise in the U.S. Consumer Price Index.

Vassili Serebriakov, FX analyst at UBS in New York, said higher tariffs are not showing just yet on inflation data, although he noted U.S. growth seemed to be slowing.

"We already priced in two cuts for the Fed this year, which was less than two last week," said Serebriakov. "The data is seen as potentially opening the window for the Fed cutting either a little bit sooner or a little bit more."

Futures tracking the Fed's policy rate showed rising bets the U.S. central bank will deliver a pair of back-to-back interest rate cuts starting in September. Before the data, bets were for a rate cut in September followed by one in December.

Thursday's U.S. data also indicated the number of Americans filing new applications for unemployment benefits was unchanged at higher levels last week as labor market conditions continued to steadily ease.

Investors rushed into safe-haven assets, with geopolitical risks in focus after U.S. President Donald Trump said some U.S. personnel were being moved out of the Middle East because "it could be a dangerous place" and that Washington would not allow Iran to develop a nuclear weapon.

A cocktail of rising Middle East tensions and concern over the fragility of the U.S.-China trade deal drew investors into safe-haven assets.

Analysts noted that the dollar serves as a key barometer of trade talk sentiment, while geopolitical instability prompted investors to buy Swiss francs and the yen.

In morning trading, the dollar was down 1% at 0.8128 Swiss francs =>, after dropping to 0.8104, the lowest since April 22. The dollar slid 0.7% to 143.68 yen. Earlier in the session, it fell to a one-week low.

The euro EUR=EBS reached its highest since October 2021 at $1.1632 and was last up 0.9% at $1.1587.

Some analysts said the euro gained support from a hawkish European Central Bank, which hinted at a pause in its year-long easing cycle after inflation finally returned to its 2% target.

However, ECB policymaker Isabel Schnabel said on Thursday the strong euro exchange rate is being driven safe-haven investors in a positive confidence shock in Europe, and not by interest rate differentials.

"The dollar has lost some of its safe-haven characteristics," said UBS' Serebriakov. "And I think the euro just benefits from that as being the second most important global reserve currency by far, the second most important trade invoicing currency, and really just the first kind of alternative to the dollar."

TRADE DEAL DEADLINE

In trade, Trump said he would be willing to extend a July 8 deadline for completing talks with other countries. But the U.S. will send out letters in coming weeks specifying trade terms to dozens of other countries which they could embrace or reject, he added.

This keeps the risk of a July 9 jump in U.S. import tariffs on the table, a negative for the dollar, some investors noted. The greenback and U.S. Treasuries dropped sharply after Trump announced a blitz of reciprocal tariffs - which he dubbed "Liberation Day" - in early April.

"By year-end, we do not expect the effective average tariff rate to be much different from its current value," said Inga Fechner, senior economist for global trade at ING, indicating duties at 10-15% for the eurozone, 50% for China and 10-15% for the rest of the world.

Against a basket of currencies, the dollar =USD fell 0.6% to 97.91. It hit 97.786, its lowest since March 2022.