Dollar Retreats as Inflation Data Cools Rate Hike Expectations

The US dollar strengthened in September but retreated against major currencies on Wednesday following data showing a smaller-than-expected increase in US inflation. The Personal Consumption Expenditures Price Index, the Fed's preferred inflation gauge, rose 0.3% last month, lower than the forecasted 0.4%. This reduced market bets on an interest rate hike from the Federal Reserve.

The dollar had been strengthening in tandem with rising US Treasury yields on growing expectations of more Fed rate hikes amid inflation driven by higher oil prices. However, the data caused US Treasury yields to fall across the board, with the 2-year note yield down 4.15 basis points to 4.848%. The euro rose 0.15% to $1.135725.

'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. Traders are now pricing a nearly 35% probability of a Fed rate hike in October, down from 70% a week ago.