Dollar retreats from 18-month high as Fed officials temper rate-hike bets

The US dollar slipped from an 18-month peak on Thursday despite hotter-than-expected inflation data, as cautious remarks from Federal Reserve officials and a pullback in Treasury yields led traders to scale back expectations of an October rate hike.

Against the dollar, the euro bounced 0.3% from an 18-month low to trade at US$1.1187. Sterling strengthened 0.2% to US$1.3224, recovering from a 13-month low.

The dollar index, which measures the US currency against a basket of peers, was down 0.1% at 102.06. It has given back most of the gains it made after Wednesday’s hot inflation reading pushed it to an 18-month high.

US Labor Department data showed the core consumer price index was up 0.3% in September versus economist expectations for a rise of 0.2%. On an annual basis it rose 2.6%, above forecasts for a rise of 2.5%, while the headline rate rose 3.7%, also above estimates for a rise of 3.6%.

Market pricing for an October Fed rate hike rose sharply to 50% on the back of the data, which gave the greenback a brief boost.

However, a chorus of comments from Fed officials, including vice-chair for supervision Michelle Bowman and San Francisco Federal Reserve Bank president Mary Daly, said the central bank can wait for a clearer picture as the October 27-28 meeting nears, effectively prompting markets to pare back those bets.

“Despite the whole CPI number coming slightly stronger than expected, I think markets have sort of taken the view that maybe it was not hot enough to force the Fed’s hand for October,” said Khoon Goh, head of Asia research at ANZ.

“October (meeting) is also a just few days before the midterm elections as well. And that’s possibly why the market doesn’t want to be more aggressive in pricing in for October,” he added.

A rally in US Treasuries which pushed down the yields also dragged the dollar lower. The yield on the US 10-year Treasury bond fell to a three-week low of 5.1267%, and the 30-year was at 5.4795%.

“The USD rally lacked punch as the retreat in Treasury yields after an initial jump softened the rates impulse,” Sim Moh Siong, FX strategist at OCBC, wrote in a note, adding that the return of the traditional negative stock-bond price correlation helped contain the dollar rally.

The focus will now shift to US producer price and retail sales data later in the day, with the former also expected to show a jump in business costs last month.

The Australian dollar fetched US$0.6952, down 0.3%, after local employment unexpectedly slid in September. The kiwi traded up 0.2% at US$0.5604.

The Japanese yen was up around 0.3% at 157.82.

Elsewhere, the offshore yuan strengthened a touch at 6.6916 per dollar after data showed China’s factory-gate inflation heated up last month as commodity costs rose.

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