The dollar fell sharply on Thursday after U.S. consumer prices rose less than expected last month and data pointed to underlying inflation having peaked, opening the way for the Federal Reserve to slow its aggressive interest rate hikes.
The consumer price index rose 0.4% in October, the same increase in the prior month, the Labor Department said. Economists polled by Reuters had forecast the CPI would advance 0.6%.
Excluding volatile food and energy, core CPI increased 0.3% month-over-month after gaining 0.6% in September.
"A softer-than-expected inflation report is acting as a tailwind for markets. Every line of the report shows sequential improvement," said Art Hogan, chief market strategist at B. Riley Wealth in New York.
"The good news is that we saw a significant sequential improvement, inflation is clearly moving in the right direction. And that keeps a more hawkish Fed at bay."
The dollar index fell 1.495% and fed funds futures priced in a sharp decline in expectations for the Fed's peak target rate, which fell below 5%. The likelihood of a 50% basis point hike by the Fed instead of 75 in December rose to 71.5%.
Annual inflation slowed as big increases last year drop out of the calculation for the index. CPI rose 7.7% in October on an annual basis, down from 8.2% the prior month, as headline inflation fell below 8% for the first time since February.
"The CPI report has reinforced the sell-off momentum in the dollar," said MUFG currency strategist Lee Hardman.
"It gives the market more confidence that there could be a turn in the inflation cycle and the Fed could slow the rate hike pace in December."
The euro rose 1.37% to $1.0148, while the Japanese yen strengthened 2.18% versus the dollar at 143.30.
The dollar had been on track for a second consecutive day of strong gains, with investors still waiting for the final results of U.S. mid-term elections on Tuesday, which will indicate whether the Democrats retain control of Congress.
The latest results showed Republicans were edging closer to securing a majority in the House of Representatives. Yet control of the Senate hung in the balance after Democrats performed better than expected. The dollar has surged more than 16% this year but lost some steam in recent weeks on hopes the Fed could begin reducing the size of its rate hikes after four consecutive increases by 75 basis points.
A crisis in the crypto world also hurt investor sentiment, analysts said. The Binance exchange on Wednesday abandoned a bailout deal of rival FTX, leaving FTX Chief Executive Sam Bankman-Fried scrambling to explore all options, with his company on the brink of collapse.
"I do think there's been a bit of contagion from what's been going on in crypto," said Ray Attrill, head of FX strategy at National Australia Bank.
Rabobank's Foley said a sell-off in crypto assets is likely to have boosted the dollar.
Bitcoin rose 10.08% to $17,478.00 after plunging in the previous session to less than $16,000 for the first time since late 2020. It has tumbled more than 60% this year.
FTX's native token, FTT, was 96% higher for the day at $2.977, though its month-to-date loss stood around 90%.
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