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NEW YORK: The dollar fell on Tuesday after data showed the smallest annual increase in inflation in more than two years, cementing expectations that the Federal Reserve will announce a pause in interest rate hikes at the end of its two-day meeting on Wednesday.

The dollar index slid 0.4% to 103.15, with the euro rising 0.5% to $1.0810. Against the yen, the dollar was down 0.3% at 139.16 yen.

Data showed that the consumer price index (CPI) edged up 0.1% last month as gasoline prices fell, after increasing 0.4% in April. In the 12 months through May, the CPI climbed 4.0%. That was the smallest year-on-year increase since March 2021 and followed a 4.9% rise in April.

The so-called core CPI increased 0.4% in May, rising by the same margin for the third straight month.

“The numbers are probably enough to see the Fed keep rates on hold this month, as they have suggested,” said Stuart Cole, chief macro economist, at Equiti Capital in London.

“But against this is the fact (that) the core monthly rate remained unchanged at 0.4%, a figure that is too high to be compatible with a 2% inflation target and very much highlighted by the much more modest fall in the annual core inflation rate. In itself, you could easily see the FOMC being able to use this figure to justify another 25-bp rise.

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