US Dollar Retreats from 18-Month Peak as Fed Caution Tempers Rate Hike Bets

The US dollar fell from an 18-month high on Thursday, even after data showed American inflation rose more than anticipated, as market expectations for an interest rate increase this month diminished following cautious remarks from Federal Reserve officials and a drop in Treasury bond yields, Reuters reported.

Dollar Index Retreats

The dollar index, which measures the US currency against a basket of six major peers, declined 0.1 percent to 102.06, surrendering most of its earlier gains that came after the inflation figures were released.

The euro climbed 0.3 percent to $1.1187, bouncing back from an 18-month trough, while the British pound added 0.2 percent to $1.3224 after touching a 13-month low earlier in the session.

Inflation Data and Fed Signals

Data from the US Labor Department showed that core consumer prices, which strip out volatile food and energy items, rose 0.3 percent in September, above the 0.2 percent increase economists had forecast. On an annual basis, core inflation stood at 2.6 percent, exceeding the predicted 2.5 percent. Headline inflation, which includes all items, increased 3.7 percent year-on-year, compared with forecasts of 3.6 percent.

The figures initially pushed the probability of a US interest rate hike at the Federal Reserve’s October 27-28 meeting to around 50 percent. However, those bets later eased after Fed officials signalled a preference to wait before making a decision, according to the report.

Khoon Goh, head of Asian research at ANZ, said that while the inflation data came in slightly above expectations, it may not be strong enough to compel the Fed to raise rates in October. He added that the approaching US midterm elections could make markets more cautious in their expectations for the rate decision.

Treasury Yields and Other Currencies

Falling US Treasury yields also weighed on the dollar. The yield on the benchmark 10-year Treasury note dropped to a three-week low of 5.1267 percent, while the yield on the 30-year bond stood at 5.4795 percent.

Markets are awaiting US producer price and retail sales data later on Thursday for further clues on inflation, the economy and the path of monetary policy.

In other currency markets, the Australian dollar fell 0.3 percent to $0.6952 after domestic employment unexpectedly declined in September. The New Zealand dollar rose 0.2 percent to $0.5604, while the Japanese yen strengthened by about 0.3 percent to 157.82 per dollar.

The offshore Chinese yuan also edged higher to 6.6916 per dollar after data showed Chinese producer prices rose last month amid higher costs for basic commodities.