NEW YORK: 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 percent last month. Economists polled by Reuters had forecast an increase of 0.4 percent.
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 percent.
The euro rose 0.15 percent to USD1.135725. 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 percent probability of a Fed rate hike in October, down from 70 percent 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 percent, at USD103.45 a barrel.
The dollar also weakened 0.25 percent 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 percent to USD1.3287 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 percent 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 percent versus the greenback to USD0.6958, and the kiwi strengthened 0.07 percent versus the greenback to USD0.5643.