In the currency market, the dollar was sharply higher against the euro. Late Friday, the euro was trading at $1.3471 vs. $1.3633 on Thursday.

The data parade was led yesterday by the Labor Department, which reported that consumer prices were unchanged in April, led by a decline in energy prices. That represented stabilization, following a 0.7% slide in the past 12 months, the largest in 54 years.

Core inflation – excluding food and energy prices – has actually accelerated in the past four months, rising 0.3% in April, the biggest increase since last July. But that’s a tad misleading, as core CPI was boosted in April by a 9.3% increase in tobacco prices as a new federal excise tax was implemented. Minus tobacco, the CPI fell 0.1% in April and the core CPI rose only 0.1%.

Many still see deflation in the cards. Core inflation will sink below 1% on a year-over-year basis by early next year, says David Greenlaw, an economist for Morgan Stanley (NYSE:MS), “reflecting the enormous further slack we expect to build up in the economy through year end.”

Meanwhile, consumer sentiment inched higher, according to the University of Michigan/Reuters survey. Its index rose to 67.9, the highest reading since September, from 65.1 in April.

Tossing a wet towel on that, Ian Pollick, economics strategist with TD Securities, wrote that Americans “don’t feel that great about the present … Rather, it is the future that they are more hopeful for…Likely, this is a function of equity market strength coupled with ‘green shoot’ stories seen during the month.”

Source: Dollar Rallies Strongly Against Euro