FOREX-US dollar retreats after softer-than-expected inflation data

The dollar retreated against major currencies on Wednesday following data showing a smaller-than-expected increase in US inflation, which reduced market bets on an interest rate hike from ‌the Federal Reserve. US Commerce Department data showed that the Personal Consumption Expenditures Price Index, the Fed's preferred inflation gauge, rose 0.3% last month. Economists polled by Reuters had forecast an increase of 0.4%.

The dollar has been strengthening in tandem with rising US Treasury yields on growing expectations of more Fed rate ‌hikes amid inflation driven by higher oil prices. But the dollar pared recent gains against the euro following the data while US Treasury yields ‌fell across the board, with the 2-year note yield, which typically moves in step with Fed rate expectations, down 4.15 basis points to 4.848%.

The euro rose 0.15% to $1.135725. The single currency is still headed for a monthly loss against the dollar after two consecutive months of gains. "We can't tell if the revised PCE data by itself or if other factors ⁠were responsible ​for a softer-than-expected print, which initially caused ⁠bonds to rally and yields to come down and the dollar to weaken," said John Velis, FX and macro strategist at BNY.

"We had some strong GDP data: the long ⁠end of the yield curve has kind of gone back up and front end is still lower so the curve is steeper. So the 2-year yield has ​come down to reflect lower expectations of an October rate hike and the dollar has come down in tandem." Traders are now pricing a ⁠nearly 35% probability of a Fed rate hike in October, down from 70% a week ago, according to the CME's FedWatch tool.

Oil prices rose and were on track for a ⁠big ​monthly gain in September as US-Iran talks aimed at ending their war stalled. Brent November futures contract, which expires on Wednesday, rose 0.84%, at $103.45 a barrel. The dollar also weakened 0.25% to 156.7987 yen. It was flat at 0.83425 versus the Swiss franc and on track for the second ⁠straight month of gains.

Sterling strengthened 0.44% to $1.3287 but was set for a monthly loss against the dollar, ending two consecutive months of gains. The dollar index, ⁠which measures the greenback against a ⁠basket of currencies including the yen and the euro, fell 0.20% to 101.20. It is still headed for a monthly gain in September, snapping two straight months of losses.

Elsewhere, the Australian dollar weakened 0.36% versus the greenback ‌to $0.6958, and the kiwi strengthened ‌0.07% versus the greenback to $0.5643.