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Written by: Staff

NEW YORK, Mar 16 (Reuters) The dollar slid to session lows on Thursday after relatively tame U.S. inflation data for February softened expectations of how high U.S. interest rates will rise.

Interest rate futures markets started to question whether the Federal Reserve will raise the fed funds rate, now at 4.5 per cent, to even 5 per cent, something they had firmly priced in until a few days ago.

This weighed on the dollar and helped push the euro to a fresh six-week high above $1.2100.

''The important aspect was core inflation, month-on-month up just 0.1 per cent. Markets are looking at that somewhat benign figure as increasing speculation that the Fed may not have to go with a rate hike at the May meeting,'' said Tim Mazanec, senior currency strategist at Investors Bank&Trust in Boston.

A U.S. government report on Thursday showed ''core'' inflation, which strips out food and energy costs, as measured by the consumer price index rose 0.1 per cent in February, compared with expectations of a 0.2 per cent rise.

The headline rate of inflation also rose 0.1 per cent on the month, in line with consensus.

Around 9:10 a.m. EST (1410 GMT/1940 IST) the euro was up 0.5 per cent at $1.2135, while sterling was up 0.3 per cent on the day at $1.7522.

The dollar erased earlier gains against the yen to trade down 0.2 per cent on the day at 117.13 yen, and also wiped out gains against the Swiss franc to trade down 0.3 per cent at 1.2918 francs.

QUESTIONS OVER 5% The Federal Reserve is widely expected to raise rates later this month to 4.75 per cent from 4.50 per cent currently.

But the inflation data on Thursday cast doubt in traders' minds on whether the central bank will push on to 5 per cent, and certainly appears to make anything above that even less likely.

''The CPI goes hand in hand with the Fed-speak ... in the last several days that takes 5.25 per cent and 5.50 per cent off the table,'' said Greg Anderson, senior foreign exchange strategist at ABN Amro in Chicago.

Meanwhile, data on Thursday also showed that the pace of housing construction in the United States slowed last month and that jobless claims last week popped up unexpectedly to the highest level this year.

Next up on the U.S. data front is the Philadelphia Fed business index for March, at noon EST (1700 GMT/2230 IST). Analysts expect a reading of 14.0, down from 15.4 the month before.

Earlier on Thursday, the central banks of Switzerland and Norway both raised interest rates by 25 basis points, as expected.


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