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Stocks dip, bonds fall as CPI keeps Fed on course

An employee of a foreign exchange trading company stands in front of a monitor, showing the graph of the recent fluctuations of the exchange rates between the Japanese yen against the euro, in Tokyo, January 26, 2015. REUTERS/Yuya Shino

By Herbert Lash

NEW YORK (Reuters) - Global equity markets dipped but remained near record highs on Friday after Federal Reserve Chair Janet Yellen said she expected U.S. interest rates to rise this year, a view that lifted bond yields and was bolstered by rising core consumer prices.

In a speech to a business group in Providence, Rhode Island, Yellen said she expected economic data to strengthen and noted that some of the U.S. economy's weakness at the start of the year might be due to "statistical noise."

Yellen's tone on when the rate lift-off would begin appeared stronger, as she and other Fed policymakers try to close the gap between the central bank's view and that of the market.

A Labor Department report on consumer prices last month added to the notion that the Fed is on track for its first rate hike in nearly a decade.

Excluding food and energy, prices increased 0.3 percent in April, the largest rise in the so-called core CPI since January 2013. In the 12 months through last month, the core CPI advanced 1.8 percent after a similar gain in March.

"Yellen is a dove more than a hawk, and she's not in a real rush to raise rates. She wants to do it, but she wants people to be prepared," said Wayne Kaufman, chief market analyst at Phoenix Financial Services In New York.

"We've been making new highs, but this isn't an enthusiastic rally," Kaufman said of the equity market. "People will likely remain bullish, but they'll keep their powder dry and allocate a little more of their portfolios to cash."

MSCI's all-country world index , a measure of stock performance in 46 countries, slipped 0.37 percent, slightly below an all-time high set in late April.

The S&P 500, a benchmark for the U.S. stock market, hit closing and intra-day records earlier in the week.

The Dow Jones industrial average (.DJI) closed down 53.72 points, or 0.29 percent, at 18,232.02 and the S&P 500 (.SPX) fell 4.76 points, or 0.22 percent, to 2,126.06. The Nasdaq Composite (.IXIC) lost 1.43 points, or 0.03 percent, to 5,089.36.

For the week, the Dow fell 0.2 percent while the S&P gained by the same amount, and Nasdaq added 0.8 percent.

The pan-European FTSEurofirst 300 index (.FTEU3) of top regional shares closed down 0.12 percent at 1,617.91.

The benchmark 10-year U.S. Treasury note was down 8/32 in price, pushing its yield up to 2.2145 percent.

The first fall in German business morale in seven months, albeit a shallower dip than forecast, supported demand for German government bonds.

German 10-year yields , the benchmark for euro zone borrowing costs, posted their first week of declines out of five.

They steadied after a dramatic sell-off that drove Bund yields up some 55 basis points from a record low of 0.05 percent in mid-April. The 10-year traded 3 basis points higher to yield 0.61 percent.

Oil prices fell as worries over the impact of war in the Middle East on crude supplies were outweighed by reports of profit-taking ahead of a long U.S. weekend.

Monday is Memorial Day in the United States and a public holiday in much of Europe, and many markets will be closed.

July Brent crude (LCOc1) settled down $1.17 at $65.37 a barrel. U.S. crude for July (CLc1) fell $1.00 to settle at $59.72 a barrel.

The dollar turned higher on the U.S. inflation report. The dollar was up 0.41 percent to 121.52 yen (JPY=), while the euro (EUR=) fell 0.92 percent to $1.1010. The dollar index (.DXY) rose 0.92 percent to 96.170.

(Editing by Bernadette Baum, Nick Zieminski and Dan Grebler)