Updates prices at 11:47 a.m ET/ 1547 GMT

By Sinéad Carew and Marc Jones

NEW YORK/LONDON, July 11 (Reuters) -A global index of stocks hit record highson Thursday, the dollar fell and Japan's yen surged after a tame U.S. inflation reading boosted bets theFederal Reserve will be able tostart cutting interestrates.

U.S. Treasury yields dropped on Thursday after U.S. consumer prices unexpectedly fell 0.1% in June after being unchanged in May while the annual increase was the smallest in a year, reinforcing views the disinflation trend was back on track.

The report followed U.S. Federal Reserve ChairJerome Powell's testimony tolawmakers on Capitol Hill that "more good data" would build the case for interest rate cuts.

"The CPI print is the big macro driver today. Anyway you look its encouraging news. It's further evidence that basically gets the Fed across the finish line to that level of confidence to initiate rate cuts," said Garrett Melson, portfolio strategist at Natixis in Boston.

And while the strategist does not expect a rate cut this month he expects to see Powell "laying the groundwork for that cut in September, at the July meeting."

But despite the supportive data Wall Street's two main indexes were mixed as investors rotated into lower-weighted interest-rate sensitive sectors such as real estate .SPLRCR and utilities .SPLRCU from heavy-weight sectors such as technology .SPLRCT, which has already rallied this year.

Also it did not help that the latest earnings reports provided a less bullish message.Both consumer bellwether PepsiCo PEP.O and Delta Air Lines DAL.N reported disappointing numbers ahead of big U.S.bank results, which will mark the unofficial start of earnings season on Friday.

At 11:47 a.m. Eastern time the Dow Jones Industrial Average .DJI rose 111.34 points, or 0.28%, to 39,832.70, the S&P 500 .SPX lost 43.61 points, or 0.77%, to 5,590.30 and the Nasdaq Composite .IXIC lost 322.90 points, or 1.73%, to 18,324.55.

MSCI's gauge of stocks across the globe .MIWD00000PUS rose 0.05 points, or 0.01%, to 824.82 after rising about 0.7% earlier in the day to a record high. Europe's STOXX 600 .STOXX index rose 0.65%.

In currencies , the dollar dropped with the Japanese yen at one point gaining more than 2% as traders priced in the likelihood of U.S. rate cuts.

There was some speculation about whether Japan had intervened to bolster its currency, which fell to a 38-year low against the greenback last week. Japan's top currency diplomat Masato Kanda said he was not in a position to comment on whether authorities had intervened, according to a Jiji Press report.

The dollar index =USD, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.54% at 104.40, with the euro EUR= up 0.34% at $1.0867.

Against the Japanese yen JPY=, the dollar weakened 1.89% to 158.62.

Also, Sterling hit an almost one-year high as comments fromBank of England policymakers and better-than-forecast GDP data led traders to reduce bets on an August rate cut in Britain.

In Treasuries, after the inflation data U.S. two-year to 10-year yields slid to their lowest since mid-March, while those on 20-year and 30-year bonds sagged to two-week troughs.

The yield on benchmark U.S. 10-year notes US10YT=RR fell 11.1 basis points to 4.17%, from 4.28% late on Wednesday while the 30-year bond US30YT=RR yield fell 8.6 basis points to 4.38% from 4.47%.

The 2-year note US2YT=RR yield, which typically moves in step with interest rate expectations, fell 14.3 basis points to 4.49%, from 4.633% late on Wednesday.

In commodity trading, oil prices edged higher after the inflation data.O/R

U.S. crude CLc1 gained 0.63% to $82.62 a barrel and Brent LCOc1 rose to $85.51 per barrel, up 0.51% on the day.

Spot goldXAU=, bolstered by the prospect of rate cuts, added 2.01% to $2,418.67 an ounce. U.S. gold futures GCc1 gained 1.61% to $2,410.50 an ounce.

Additional reporting by Sinéad Carew in New York, Marc Jones in London, Tom Westbrook in Singapore; editing by David Evans and Chris Reese

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