Dollar slides, CPI report suggests Fed could slow pace of rate hikes

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By Herbert Lash

NEW YORK (Reuters) - The dollar fell sharply on Thursday after U.S. consumer prices rose less than expected in October and suggested underlying inflation has peaked, data that markets cheered as it may allow the Federal Reserve to slow the pace of its interest rate hikes.

The slowing consumer price index sparked big gains in major foreign currencies against the dollar, with the Japanese yen poised to post its biggest single-day jump since 2015 and the British pound on track for its biggest one-day rise since 2017.

The annual increase in headline inflation fell below 8% for the first time in eight months, a slowdown that led Treasury yields to plunge and put the benchmark 10-year Treasury note on pace for its largest daily decline since March 2009.

Equity markets soared, with the Nasdaq surging more than 6% in midday trade. But Cleveland Fed President Loretta Mester indicated it's too early to sound the all-clear signal as the main risk to inflation is that the U.S. central bank doesn't hike rates enough.

The softer-than-expected inflation acted as a tailwind for markets, said Art Hogan, chief market strategist at B. Riley Wealth in New York.

"Every line of the report shows sequential improvement," Hogan said. "Inflation is clearly moving in the right direction, and that keeps a more hawkish Fed at bay," he said.

The consumer price index rose 0.4% in October to match the prior month's increase, the Labor Department said. Economists polled by Reuters had forecast the CPI would advance 0.6%.

Excluding volatile food and energy components, the CPI increased 0.3% on a month-over-month basis after gaining 0.6% in September.

"The CPI report has reinforced the sell-off momentum in the dollar," said Lee Hardman, a currency strategist with MUFG in London.

The dollar has surged more than 16% this year, exacerbating its decline on Thursday. The spike higher in the yen and other currencies versus the dollar stirred speculation the Bank of Japan intervened, which analysts doubted.

"I think this reflects the data. I seriously doubt this is any sort of coordinated intervention move," said Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

The dollar's drop was due to the decline in Treasury yields, said George Goncalves, head of U.S. macro strategy at MUFG Securities Americas.

"Everything is reacting to the sharp declines we're seeing in rates," Goncalves said. "This has been a strong dollar regime. Now people are having a change of heart today" in their view of the market, he said.

Fed funds futures priced in a drop in expectations for the U.S. central bank's peak target rate, which fell below 5%. The likelihood of a 50-basis-point rate hike by the Fed instead of a 75-basis-point increase in December rose to 71.5%.

The Cleveland Fed's Mester said that monetary policy needed to become more restrictive and remain restrictive for a while to put inflation on a sustainable downward path to the Fed's target of 2%.

Annual inflation slowed as big increases last year dropped out of the calculation for the index. CPI rose 7.7% in October on a year-over-year basis, down from 8.2% in the prior month, as headline inflation fell below 8% for the first time since February.

The surprise downside in headline and core CPI provides further evidence the economy is past peak inflation, said Joseph LaVorgna, chief U.S. economist at SMBC Nikko Securities.

While the Fed remains on track to raise rates by 50 basis points in December, hikes in 2023 are in doubt because history shows the pace at which inflation declines always mirrors its prior moves higher, LaVorgna said in a note.

The euro rose 1.52% to $1.0163, while the yen strengthened 3.16% versus the dollar at 141.98 and sterling traded at $1.1668, up 2.75% on the day.

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.

Bitcoin rose 9.17% to $17,333.00 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 155% higher for the day at $3.875, though its month-to-date loss stood around 85%.

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Currency bid prices at 1:29 PM (1829 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 108.5100 110.3400 -1.64% 13.429% +110.9900 +108.1500

Euro/Dollar $1.0148 $1.0013 +1.38% -10.71% +$1.0185 +$0.9936

Dollar/Yen 142.1300 146.3650 -2.89% +23.47% +146.5850 +141.4750

Euro/Yen 144.23 146.56 -1.59% +10.67% +146.7400 +143.9900

Dollar/Swiss 0.9691 0.9843 -1.52% +6.26% +0.9899 +0.9663

Sterling/Dollar $1.1652 $1.1360 +2.60% -13.82% +$1.1685 +$1.1358

Dollar/Canadian 1.3375 1.3526 -1.12% +5.79% +1.3570 +1.3334

Aussie/Dollar $0.6569 $0.6431 +2.13% -9.64% +$0.6597 +$0.6388

Euro/Swiss 0.9834 0.9854 -0.20% -5.16% +0.9895 +0.9821

Euro/Sterling 0.8707 0.8812 -1.19% +3.65% +0.8819 +0.8704

NZ Dollar/Dollar $0.5990 $0.5884 +1.90% -12.41% +$0.6017 +$0.5841

Dollar/Norway 10.1420 10.3965 -2.49% +15.07% +10.4610 +10.1100

Euro/Norway 10.2958 10.3981 -0.98% +2.83% +10.4271 +10.2856

Dollar/Sweden 10.6675 10.8804 -0.68% +18.29% +10.9527 +10.6150

Euro/Sweden 10.8255 10.8995 -0.68% +5.78% +10.9285 +10.8083