Dollar pulls back from one-year high after inflation data

© Reuters. FILE PHOTO: A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo August 2, 2011. REUTERS/Yuriko Nakao/File Photo

By John McCrank

NEW YORK (Reuters) -The dollar eased back from a one-year high on Wednesday as longer-dated Treasury yields fell after U.S. inflation data that showed prices rose solidly in September, advancing expectations for Federal Reserve tightening.

The consumer price index rose 0.4% last month, versus a 0.3% rise anticipated by economists polled by Reuters. In the 12 months through September, the CPI increased 5.4%, up from a 5.3% year-on-year advance in August.

Excluding the volatile food and energy components, the so-called core CPI climbed 0.2% last month, up from 0.1% in August.

Yields on shorter-term Treasuries, which typically move in tandem with interest rate expectations, increased after the report, while longer-dated yields dipped. [US/]

The gap between the two- and 10-year Treasury notes, seen as an indicator of economic expectations, closed to its narrowest in two weeks, after having widened to a 3-1/2 month high on Friday.

"The market is now seeing a major pivot here as far as how inflation is showing more signs of being persistent than transitory, and that's likely to force the Fed's hand to deliver a rate hike well in advance of what people were anticipating," said Edward Moya, senior market analyst at Oanda.

The market had been pricing in a rate hike for December of next year, but now it is eyeing September, he said.

The greenback initially moved higher after the CPI data, touching a nearly three-year high versus the Japanese yen, before edging lower along with the longer-dated bond yields.

The dollar index, which measures the greenback against six rivals, was last down 0.347% at 94.195 from Tuesday, when it touched 94.563, its highest since late September 2020.

"The dollar has had a significant move higher and it's been ripe for a pullback here and I think this is going to likely trigger that," Moya said.

The dollar slid 0.15% versus the yen to 113.460 yen.

A surge in energy prices has added to inflation concerns and stoked bets that the Fed may need to act faster to normalize policy than previously projected.

The euro was up 0.35% at $1.1570, trending away from its nearly 15-month low of $1.1522 hit in the previous session.

The Fed will release the minutes from its September meeting later on Wednesday and they will be parsed for signs of a November announcement that the central bank will announce a tapering of its bond-buying stimulus.

"Today's FOMC minutes release could confirm that a November taper announcement may be hard to resist for the Fed, but also that there were discussions of the potential impact from further tightening of U.S. and global financial conditions," said Valentin Marinov, head of G10 FX research at Credit Agricole (OTC:CRARY).

"We further believe that, following the rather mixed U.S. jobs report for September and the delay rather than the resolution of the U.S. debt ceiling issue, the Fed could ultimately opt for a more gradual start to QE taper."

Three Fed policymakers including Vice Chair Richard Clarida said on Tuesday the U.S. economy has healed enough to begin to scale back the central bank's asset-purchase program.

But most Fed policymakers continue to say inflationary pressures will prove transitory.

Governors Lael Brainard and Michelle Bowman are among the Fed officials due to speak later on Wednesday.

The commodity-linked Aussie dollar rose 0.31% to $0.7373, close to its one-month high of $0.7384 hit on Tuesday.

Bitcoin traded up 0.53% at $56,294.92, after reaching a five-month high of $57,855.79 at the start of the week.