FOREX-Dollar recedes from 18-month high as bond rally tempers impact of hot inflation data

​The dollar retreated from an 18-month peak on Thursday as ‌investors ​looked past strong US inflation and spending data to focus on a shakeout in the securities of AI data center firms. US producer prices rose by the most in 4-1/2 years in September as goods and services costs increased, adding to evidence that inflation pressures are ‌spreading beyond energy.

Retail sales rose more than expected last month, lifted by higher gasoline prices, while weekly jobless claims marginally increased, pointing to resilient consumer demand and a stable labor market. But government bonds rallied and the dollar pulled back, reflecting cautious remarks from Federal Reserve officials that further cooled expectations for an October interest-rate hike.

"We have a narrative that is dollar negative based on the idea ‌that inflation at this level and this quick pace is unsustainable," said Juan Perez, director of trading at Monex USA in Washington. "Regardless of no good news on the ‌war front or the equity picture looking pessimistic, the market is anti-USD after a heavy dose of strengthening in the last four weeks. ... The economic stagnation seems to be having more influence in (the) mind of traders."

AI COMPANIES' DEBT BURDENS The dollar index, which measures the US currency against a basket of peers, fell 0.45% to 101.99, having hit an 18-month high on Wednesday after US inflation figures came in stronger than expected.

That helped the euro bounce 0.56% ⁠from an ​18-month trough to $1.1218, putting it on track for its ⁠biggest daily gain in nearly two months. Sterling strengthened 0.64% to $1.3275 after data showed Britain's economy unexpectedly grew 0.1% in August. Markets grew choppy after Wednesday's hot US CPI reading initially bolstered bets on higher-for-longer Fed rates, while renewed ⁠concerns over AI companies' heavy debt burdens fuelled safe-haven flows into Treasuries.

"The selloff in chip stocks offers support to bonds, helping keep yields in check despite the inflationary signals," said Uto Shinohara, senior investment strategist ​at Mesirow Currency Management. Traders now see a 73% chance that the Fed will leave rates unchanged at its October 27-28 meeting, compared with 53% a month ago, CME ⁠Group's FedWatch Tool showed.

The expected likelihood of a hike rose sharply after the CPI report, but bets eased after Fed officials including Vice Chair for Supervision Michelle Bowman and San Francisco Fed President Mary Daly said the central ⁠bank ​could wait for more clarity before the meeting. "If yields struggle to extend higher and dollar rallies continue to attract sellers, it will strengthen our conviction that the inflation news is largely absorbed, leaving the balance of risks tilted in favor of risk assets," said Joel Kruger, a market strategist at LMAX Group in London.

Investors will also watch remarks from Fed ⁠officials including Chair Kevin Warsh at IMF-World Bank annual meetings in Bangkok on Friday for clues on the US central bank's next move. The Australian dollar weakened 0.77% to $0.6919, after local employment ⁠unexpectedly slid in September, while the Japanese yen ⁠strengthened 0.15% to 158.08 per dollar.

"With the Fed entering its blackout period shortly and no tier-one data releases remaining before the meeting, market direction will likely remain driven by geopolitical uncertainty surrounding Russia/Ukraine and Iran, alongside developments in the AI story," said Shinohara.