Dollar wipes gains, stocks rise after U.S. CPI

LONDON (Reuters) - Stock markets rose, while the dollar lost its early gains and bonds cut losses on Wednesday after U.S. consumer prices rose less than expected, injecting a hint of doubt into expectations of a pause in Fed interest rate cuts.

U.S. consumer prices rose a smaller-than-expected 0.2 percent in April as energy prices held steady, a Labor Department report showed.

The rise was less than the 0.3 percent Wall Street analysts polled by Reuters were expecting after a 0.3 percent advance in March. So-called core prices, which exclude volatile food and energy, were up just 0.1 percent, half the increase analysts had forecast.

The disappointing CPI reading led U.S. interest rate futures to show briefly a 10 percent chance of a 25 basis point rate cut at the next Fed meeting in June, following 325 basis points' worth of cuts since September aimed at helping to offset damage to U.S. growth caused by the credit crunch.

"These numbers will spark some doubt as to whether Fed easing is truly over. They seem to leave the door open for further rate cuts," said Ashraf Laidi, chief market analyst at CMC markets in New York.

By 8:40 a.m. EDT, the dollar had lost its earlier gains against the euro, leaving the common currency up 0.1 percent on the day at $1.5479, while the FTSEurofirst 300 index of top European shares was up 0.4 percent at 1,351.69 points.

Bund futures pared losses, while U.S. stock market futures turned higher with S&P 500 futures up 3.9 points, above fair value -- a mathematical formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract.

Benchmark 10-year notes were last down 2/32 in price for a yield of 3.92 percent. Prior to the CPI data, they were down 12/32 for a 3.96 percent yield.

The dollar's losses also helped gold prices to rally.

(Reporting by Veronica Brown; Editing by David Stamp)