Closely watched 'core' measure of inflation comes in flat; greenback falls against euro and yen.

May 18, 2005: 9:29 AM EDT

NEW YORK (CNN/Money) - Bonds rose and the dollar fell after a closely watched inflation reading came in flat, lessening the chances that the Federal Reserve will more aggressively raise interest rates.

The benchmark 10-year note rose 13/32 of a point to 100-15/32 to yield a three-month low of 4.06 percent, down from 4.12 late Tuesday.
Meanwhile, the 30-year bond jumped 22/32 of a point to 114-11/32 to yield 4.43 percent, down from 4.47 in the previous session. Bond prices and yields move in opposite directions.
Prices for the five-year note added 7/32 of a point to 100-16/32, yielding 3.75 percent, and the two-year note edged higher 3/32 of a point to 100-4/32, yielding 3.54 percent.
The Consumer Price Index measures the price level of a fixed basket of goods and services, and is one of the Fed's favorite inflation indicators.
The CPI for April rose 0.5 percent, according to the Department of Labor. Analysts surveyed by Briefing.com had forecast a 0.4 percent rise.
But the so-called "core" CPI, which subtracts often-volatile food and energy costs, was unchanged on the month, versus the average forecast for a 0.2 percent rise.
The surprisingly soft read on underlying inflation allowed bond traders to breathe a sigh of relief since higher inflation erodes the value of the fixed-income investment.
In currency trading, the dollar strengthened against the euro and yen, as the market trimmed expectations that the Fed will pick up its pace of monetary tightening. Rising interest rates generally help the dollar as they make dollar-denominated securities more attractive to foreign investors.
The euro bought $1.2628, up from $1.2604 late Tuesday, while the dollar bought ¥ 107.29, down from ¥107.50 the previous session.

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