Dollar heads for longest losing streak in a year ahead of U.S. inflation data

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By Marc Jones

LONDON (Reuters) - The dollar was heading for its longest losing streak in a year and world stocks were higher for a fifth straight day on Tuesday, ahead of U.S. inflation data expected to show the furious surge in prices may finally be cresting.

Another welcome dip in European gas prices helped the STOXX 600 move up 0.2%, lifting MSCI's 47-country world index a similar amount ahead of another expected rise on Wall Street later. [.N][GVD/EUR]

Euro zone bond markets had seen yields flinch lower after German business confidence data showed rising recession angst there.

But the day's main event will be U.S. inflation figures due at 1230 GMT, data that will feed into next week's Federal Reserve meeting.

Economists expect a slight decline in the headline inflation number to around 8% year-on-year, while the core rate, which strips out the more volatile elements, is forecast to see the same rise of 0.3% month-on-month as in July.

"I would concentrate on the core month-on-month number for a surprise either higher or lower," said John Hardy, Saxo bank's head of FX strategy, adding that Tuesday could be a key day for the dollar, following its recent mini slump.

"Everyone is priced for 75 basis points (as a rise in U.S. interest rates next week), so it is more about if this is peak Fed, and what happens into year-end and next year."

A hefty drop in commodity prices over the past couple of months has helped cool some of the inflation worries that forced major central banks to hike interest rates sharply this year.

European gas prices fell another 4.5% on Tuesday to stand as low as 181.80 euro per megawatt hour < TRNLTTFMc1>, taking their drop since late last month to 47%.

Brent crude was up around 1%, on course for its fourth day of gains. But at $94 a barrel, it is down 25% since mid-June and off nearly a third from its peak of $139 a barrel shortly after Russia invaded Ukraine. [O/R]

Interest rate futures imply a 90% chance that the Federal Reserve will lift its benchmark interest rate by 75 basis points at next week's policy meeting - a position that is perhaps most vulnerable to a downside CPI surprise.

"A further cooling in inflation would support the case for a step down in the pace of policy tightening to a 50 basis points rate hike at the FOMC meeting next week," said Kristina Clifton, a senior economist at CBA.

"Nevertheless, an upside surprise to inflation will easily cement market expectations of another outsized 75 basis points rate hike."

GRAPHIC: Are we nearly there yet? https://graphics.reuters.com/GLOBAL-INFLATION/gdvzyxnbopw/chart.png

MEETING OF MINDS

Wall Street indexes were pointing to a fifth straight day of gains for the main S&P 500, Dow Jones Industrial and Nasdaq markets later.

MSCI's broadest index of Asia-Pacific shares ex-Japan had continued its bounceback from two-year lows overnight too, thanks to a jump of 2.7% in South Korea's KOSPI, while Japan's Nikkei had put on 0.25%. [.KS][.T]

Data there, though, was mixed. A jump of 9% year-on-year in Japanese wholesale prices points to pressure on corporate margins, yet a slowdown in gains for August holds out some hope of relief.

China's president, Xi Jinping, was preparing for a meeting with Russian President Vladimir Putin in the coming days while, in New Zealand, home prices showed a drop of 6% year-on-year following its recent run of interest rate hikes.

Back in the currency markets, the dollar index, which gauges the greenback against six major peers, was down 0.4% ahead of U.S. trading at just below 108.

Tailwinds from last week's European Central Bank rate hike and the drop in gas prices helped the euro extend its bounce to a fourth day out of the last five. It was firmly above parity at $1.0164 and up 3% since last week's ECB move. [FRX/]

Ukraine's progress in driving back Russian forces in its northeast in recent days seemed to be helping again.

Even the battered Japanese yen got a breather at 142.34 per dollar. That was up from last week's 24-year low of 144.99 amid signs that some investors might now be closing their bets against the currency.

U.S. Treasury yields rallied after some lacklustre auctions that had sent 30-year yields up to around 3.5%.

Benchmark 10-year yields, which move inverse to price, dipped to 3.3175% in European trade [US/] as Germany's data left its Bund yields, the benchmark for the euro area, flat at 1.66%. [GVD/EUR]

Antoine Bouvet, senior rates strategist at ING in London, said supply was also a factor, although the U.S. inflation data up shortly would dominate the rest of the session.

"There is a lot (of supply) to absorb and investors are understandably nervous about buying more bonds after a hawkish ECB meeting and more generally due to elevated rates volatility," Bouvet added.

(Afdditional Reporting by Yoruk Bahceli in Amsterdam; Editing by Bradley Perrett and Clarence Fernandez)