By Kate Duguid
NEW YORK (Reuters) - The dollar fell in North American trade on Tuesday as expectations for inflation picked up slightly and the euro rose on optimism about the possibility of a European Union stimulus package.
The U.S. dollar index <=USD>, which measures the safe-haven greenback against a basket of six rival currencies, was down 0.29% at 96.271.
U.S. consumer prices rebounded by the most in nearly eight years in June, according to a Labor Department report released Tuesday. The increase, which ended three straight months of declines, was driven by a 12.3% jump in gasoline prices after dropping in the first five months of the year.
However, analysts argued that evidence of inflation was better seen in indicators other than the consumer price index.
"If anything, the CPI print is understating actual inflation in the U.S. economy," said Karl Schamotta, chief market strategist at Cambridge Global Payments.
Investors have been buying Treasury Inflation-Protected Securities (TIPS) to insure against inflation, expected to rise because of the enormous coronavirus stimulus measures taken by the Federal Reserve and Treasury Department. The inflation-adjusted yield on the 10-year TIPS <US10YTIP=RR> has been trading with a negative yield since late March and is now at minus 0.797%, near an all-time low.
"As the economy has recovered a bit, inflation expectations have rebounded and nominal yields have been capped so that turns real yields increasingly negative and it adds to the jeopardy for the dollar," said Daniel Katzive, head of FX strategy North America at BNP Paribas.
The weaker dollar was also partly attributable to a move higher in the euro <EUR=> on hopes the European Union will agree on a rescue financing package that will limit the economic damage to the bloc from the coronavirus pandemic. The euro was up 0.44% at $1.139.
"Market consensus has shifted towards the euro on the assumption that euro area will suffer less economic damage and that a large rescue package will be approved," said Schamotta.
He cautioned, however, that "history would suggest that market participants shouldn't get their hopes too high around a rescue package. Ultimately, it is likely to be smaller and more diluted than what is on the table right now."
(Reporting by Kate Duguid in New York and Tommy Wilkes in London; Editing by Chris Reese and Jonathan Oatis)