Dollar retreats from 18-month high despite strong US inflation data

The U.S. dollar witnessed a retreat from an 18-month high on Thursday, despite inflation figures exceeding expectations, as Federal Reserve officials signaled caution and a decline in Treasury yields prompted traders to revise their forecasts for a potential October rate hike. Against the greenback, the euro rebounded 0.3% to trade at $1.1187, while the British pound strengthened 0.2% to $1.3224.

The dollar index, which gauges the U.S. currency against a range of counterparts, slipped 0.1% to 102.06, retracing much of the gains it achieved following Wednesday's strong inflation report. September's core consumer price index rose 0.3% compared to the 0.2% forecast, while the headline rate climbed 3.7%, surpassing the 3.6% estimate.

Market expectations for an October Fed rate increase surged to 50% in response to the data, causing the dollar to experience a brief uptick. However, a series of remarks from influential Fed officials, such as Vice Chair Michelle Bowman and San Francisco Fed President Mary Daly, suggested the central bank may wait for more clarity, potentially diminishing the market's enthusiasm for an October hike.

"Even though the CPI number came out stronger than expected, I believe markets have interpreted it as not being hot enough to compel the Fed to act in October," said Khoon Goh, head of Asia research at ANZ. "Additionally, the upcoming midterm elections may have contributed to the market's reluctance to price in a rate hike so soon."

A surge in U.S. Treasury yields, which fell to a three-week low of 5.1267% for the 10-year bond and 5.4795% for the 30-year bond, also contributed to the dollar's decline. The return of the typical negative correlation between stocks and bonds helped contain the dollar rally. The focus will now turn to subsequent economic data releases, such as producer price and retail sales figures, which are anticipated to reveal further cost increases.

Meanwhile, the Australian dollar fell 0.3% to $0.6952 after local employment data showed a surprising drop in September, while the New Zealand dollar gained 0.2% to $0.5604. The Japanese yen strengthened around 0.3% to 157.82. In other currency markets, the offshore renminbi marginally improved to 6.6916 per dollar following reports of a rise in factory-gate inflation in China due to higher commodity prices.