FOREX-Dollar retreats from 18-month high despite hot CPI as Fed officials temper hike bets

The 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 $1.1187. Sterling strengthened 0.2% to $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 $0.6952, down 0.3%, after local employment unexpectedly slid in September. The kiwi traded up 0.2% at $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.