by Kevin Buckland

TOKYO (Reuters) – The dollar fell to a one-month low against the euro on Wednesday on lower Treasury yields, as investors braced for a key U.S. inflation report later in the day that could set the Federal Reserve’s policy path .

However, the yen hovered near a two-week low as the still wide yield gap between local bonds and U.S. bonds continued to encourage selling of the Japanese currency.

The euro rose 0.03% to $1.0823 during Asian trading hours, having earlier risen to $1.0828 for the first time since April 10.

The index – which measures the currency against six major rivals but is heavily overweight against the euro – fell 0.11% to 104.94, after earlier falling to a week-and-a-half low of 104.92.

The benchmark long-term U.S. Treasury bond yield fell to 4.4414%, extending an overnight retreat of 3.1/2 basis points (bps).

Wednesday’s report on core consumer prices is expected to show CPI rose 0.3% month-on-month in April, compared with a 0.4% gain in the previous month, a Reuters poll showed.

“The market will either sink or swim together,” Deutsche Bank strategist Alan Ruskin wrote in a note, noting the “extremely rare” concentration of analyst forecasts at 0.3%.

He noted that expectations for the path of interest rates are “a little more rigid than usual” and it would take more than one modest up or down surprise for markets to move significantly.

However, in the event of a “big upward move” of 0.5% or more, “thinking early about the next move, perhaps an increase, would result in a very large-scale revaluation of interest rates and a serious rise in the dollar against all currencies,” he said. .

Fed Chairman Jerome Powell on Tuesday offered an hopeful assessment of the U.S. economy, with prospects for continued above-trend growth and confidence in failing inflation, which, while subdued by the latest data, remains largely unchanged.

Stronger-than-expected consumer prices in the first quarter of the year were the driving force behind the Fed’s piercing reassessment of the pace of interest rate cuts, with those expectations now down to about 45 basis points of cuts this year.

Despite the dollar’s broad weakening overnight against most other countries, the dollar continued to rise against the yen. The dollar fell 0.12% to 156.245 yen on Wednesday, but rose as high as 156.80 overnight.

Unlike their US counterparts, long-term yields in Japan are just 0.955%, even though the Bank of Japan’s rhetoric has become more hawkish in recent days and the prospects for another interest rate hike in June have increased.

The dollar’s appreciation to a 34-year high of 160.245 yen on April 29 triggered two rounds of aggressive yen buying, which traders and analysts say was the work of the BOJ and Japan’s finance ministry.

“The BOJ hopes that today’s US CPI release will be in line with expectations to avoid having to have a difficult conversation tomorrow on when to launch a third round of intervention – given that the previous two rounds have not yet resulted in a reversal of the yen’s fortunes.” – wrote Tony Sycamore, an analyst at IG, in a note to a client.

Elsewhere, the yuan rebounded from a two-week low against the dollar as a report on a possible plan to ease the country’s housing glut lifted sentiment, outweighing U.S. President Joe Biden’s decision to impose steep tariff increases on a range of Chinese goods.

The dollar fell 0.24% to 7.2232 yuan in foreign trade, after hitting its highest level since May 1 at 7.2460 overnight.

Antipodean currencies also benefited from China’s optimism, with the Australian dollar gaining 0.32% to $0.6648, after previously reaching $0.6651 for the first time since March 8.

The New Zealand dollar rose 0.37% to $0.6062, having previously touched $0.6064 for the first time since April 10.