Dollar sags after US GDP and inflation surprise, except against yen By Reuters

By Alden Bentley,Bond Forex Platform Gertrude Chavez-Dreyfuss and Stefano Rebaudo

NEW YORK/MILAN (Reuters) -The U.S. dollar eased against most currencies on Thursday in tight seesaw trade after data showed the economy grew at a surprisingly slow pace and inflation came in hotter than expected in the first quarter, potentially tying the Federal Reserve's hands on easing interest rates in coming months.

While the dollar was hardly shaken against the beleaguered yen, it otherwise saw only a brief gain after the Commerce Department reported that U.S. gross domestic product grew at a 1.6% annualized rate in the January-March period, slower than the 2.4% rate expected by economists polled by Reuters.

The report also showed that underlying inflation as measured by the core personal consumption expenditures (PCE) price index rose 3.7% in the first quarter, eclipsing forecasts for a 3.4% rise.

The inflation surprise puts an even greater-than-usual focus on the release on Friday of PCE price index data for March. The monthly PCE index, and core PCE index factoring out food and energy prices are among the Fed's most important gauges of price behavior. Inflation remains stubbornly above the U.S. central bank's 2% inflation target.

"The market reaction to the (GDP) data tells all you need to know about what investors are focused on and it's mostly inflation and not growth," said Boris Kovacevic, global market strategist at Convera in Vienna, Austria.

"The print on the 3.7% PCE does suggest that tomorrow's PCE number will be higher. Will the dollar rally be sustained in the medium term?"

The yen, meanwhile, hit a fresh 34-year low versus the dollar and a 16-year low against the euro on Thursday as investors expect a Bank of Japan (BOJ) policy meeting that ends on Friday to not be hawkish enough to support the Japanese currency.

The , a measure of the U.S. currency's value against six rivals, reversed a small overnight loss after the data caused benchmark Treasury yields to rise, topping at 106.00. It was last at 105.69, off 0.01%.

Conversely, the greenback fell as low as 155.31 yen after the GDP data, but was last up 0.1% at 155.545 yen.

The greenback peaked at a 34-year high of 155.75 yen, while the euro/yen pairing surged to 167.025.

Many investors have seen the dollar/yen 155 level as a line in the sand for Japanese authorities, above which the BOJ could intervene to shore up the currency. The market is on high alert for such central bank action.

The European single currency was up 0.2% on the day at $1.0716.

Following the GDP data, the U.S. rate futures market was pricing in a 56.7% chance of a Fed rate cut in September, down from 70% late on Wednesday, according to CME Group's (NASDAQ:) FedWatch tool.

Rate futures traders on Thursday were factoring in a 66% chance that the Fed's first rate cut since 2020 could happen at its meeting in November.

"The inflation figures ... potentially even point to the need for a further tightening," said Stuart Cole, chief macro economist, at Equiti Capital in London. "We know that returning CPI (consumer price index) to target is the Fed's main objective and therefore, on balance, today's figure probably pushes an interest rate cut further down the road."

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