By Michael Connor
NEW YORK (Reuters) - The dollar and U.S. Treasuries yields rose on Tuesday after a report showed U.S. consumer prices climbed in May at their strongest pace in a year.
Stocks on world markets were mixed, with European issues up slightly, fueled by corporate merger and acquisition speculation. Wall Street was flat as Federal Reserve policymaking officials gathered for a two-day meeting.
Oil traders, after initial calm on the absence of an escalation in the Iraq crisis overnight, continued to push prices higher.
The U.S. Labor Department said its Consumer Price Index rose 0.4 percent last month. The gain was the largest since February 2013 and topped expectations for a 0.2 percent rise, following a 0.3 percent advance in April.
The uptick should comfort some Fed officials, who worry inflation is running too low. Still, a separate inflation gauge watched closely by the Fed continues to run below the central bank's 2 percent target.
"It was a much stronger print than the market was expecting and many are thinking that that may lead to a more hawkish tone tomorrow," said Michael Pond, head of global inflation-linked research at Barclays in New York.
Fed officials are expected to trim their bond buying program further at the conclusion of their meeting on Wednesday, although the Fed is not expected to raise interest rates until mid-2015.
The U.S. dollar rose on the CPI data, with the dollar index up 0.17 percent.
"If the Fed decides to be less dovish, that could give a bid to the dollar," said Sebastien Galy, currency strategist at Societe Generale in New York.
U.S. Treasuries' prices fell on the CPI data, which analysts said may give the Fed more confidence in quickening an end of its extremely low interest rate regime.
Benchmark 10-year notes fell 12/32 in price to yield 2.6405 percent, up from 2.60 percent late on Monday. Thirty-year bonds dropped 25/32 in price to yield 3.44 percent, up from 3.40 percent.
Wall Street was flat. The Dow Jones industrial average was up 1.35 points, or 0.01 percent, at 16,782.36. The Standard & Poor's 500 Index was up 0.71 point, or 0.04 percent, at 1,938.49. The Nasdaq Composite Index was up 11.76 points, or 0.27 percent, at 4,332.86.
An index of European shares was up 0.3 percent, while the MSCI index of world stock markets slipped 0.03 percent.
Oil prices initially steadied as U.S. and Iranian officials, in a rare sign of rapprochement, discussed the Iraq crisis on the sidelines of a nuclear conference in Vienna, although they both ruled out military cooperation to face down the Sunni militant onslaught that threatens to break up Iraq.
But prices resumed their climb, with Brent crude for August delivery up 73 cents to $113.67 per barrel. U.S. light crude gained 22 cents to $107.12.
(Reporting by Michael Connor in New York; Editing by Dan Grebler)
