FOREX-Dollar little changed as U.S. inflation data poses quandary for Fed

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Pace of inflation slows but remains strong

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Market sees Federal Reserve hiking rates next week

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Dollar slips as interest rate advantage fades

(Adds comment, fresh prices) By Herbert Lash NEW YORK, March 14 (Reuters) - The dollar traded little changed on Tuesday after strong consumer price data revived the likelihood that the Federal Reserve will hike interest rates next week as fears of turmoil spreading in the banking sector faded.

The dollar index , a measure of the greenback against six other currencies,

fell 0.087% as Treasury yields jumped a day after the two-year note, which moves in step with interest rate expectations, plunged the most in a single day since 1987.

The euro edged up 0.09% to $ 1.0739 , but the dollar gained against the safe-haven yen and Swiss franc.

Fed funds futures showed the market's risk adverse mood in recent days eased as bets that the Fed would stand pat at its policy meeting March 21-22 declined. That probability fell to 28.4% from 43.9% on Monday, according to CME's FedWatch Tool.

But with the likelihood of a 50 basis point hike next week off the table, the dollar's recent strength from higher rates on Treasury notes than foreign government debt also retreated. The collapse of Silicon Valley Bank and Signature Bank last week suggests greater Fed scrutiny of the banking sector may be in store as credit tightens.

"Risk around bank lending is skewed to the downside," said Thierry Wizman, Macquarie global rates and FX strategist in New York. "With the regulatory burden and the prospect of net interest margins at banks getting squeezed, you can make the case that it's only going get worse."

Americans faced persistently higher costs for rental housing and food in February, challenging the Fed to bring inflation under control while stabilizing financial markets after the bank failures.

Futures priced in perhaps two Fed rate cuts by year's end, with the terminal rate seen at 4.179% in December, down from more than 5% last week. The

Consumer Price Index (CPI) rose 0.4% last month after accelerating 0.5% in January. In the 12 months through February, the CPI increased 6.0%, a slower pace than the 6.4% annualized gain in January, but still far off the Fed's 2% target.

The Japanese yen weakened 0.69% at 134.13 per dollar, while the greenback rose rose 0.15% against the Swiss franc. Sterling was

down 0.05% at $ 1.2175 after jumping 1.22% on Monday. Data on Tuesday showed UK pay growth slowed in the three months to January.

Currency bid prices at 4:08 p.m. (2008 GMT) Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid Previous Change

Session
Dollar index 103.5800 103.6800 -0.09% 0.087% +104.0500 +103.4900 Euro/Dollar $1.0739 $1.0729 +0.08% +0.21% +$1.0750 +$1.0679 Dollar/Yen 134.1300 133.2300 +0.69% +2.32% +134.8950 +133.0300 Euro/Yen 144.05 142.93 +0.78% +2.67% +144.4100 +142.5500 Dollar/Swiss 0.9131 0.9120 +0.11% -1.26% +0.9164 +0.9096 Sterling/Dollar $1.2174 $1.2183 -0.07% +0.67% +$1.2203 +$1.2139 Dollar/Canadian 1.3678 1.3732 -0.39% +0.96% +1.3750 +1.3653 Aussie/Dollar $0.6682 $0.6668 +0.26% -1.93% +$0.6696 +$0.6633 Euro/Swiss 0.9804 0.9782 +0.22% -0.92% +0.9823 +0.9748 Euro/Sterling 0.8819 0.8806 +0.15% -0.28% +0.8836 +0.8779 NZ Dollar/Dollar $0.6238 $0.6220 +0.32% -1.72% +$0.6247 +$0.6180 Dollar/Norway 10.5370 10.5520 -0.07% +7.45% +10.6420 +10.5140 Euro/Norway 11.3160 11.3180 -0.02% +7.84% +11.3950 +11.2758 Dollar/Sweden 10.4611 10.5914 -1.17% +0.51% +10.6623 +10.4550 Euro/Sweden 11.2354 11.3686 -1.17% +0.77% +11.3947 +11.2230

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ World FX rates Euro to dollar ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Herbert Lash; additional reporting by Harry Robertson in London; Editing by Andrew Heavens, Angus MacSwan and Richard Chang)