Dollar Falls to 2-Month Low as Bets on 50bps Rate Hike Surge

The dollar stayed near two-month lows on Friday after dropping sharply on slower-than-expected U.S. inflation data, with Treasury yields also down as investors bet for a weaker interest rate hike by the Federal Reserve in December.

After falling 2.2% the previous session to its lowest point since mid-September, the dollar index and dollar index futures remained unchanged on Friday. Yields on 10-year U.S. Treasuries set a new monthly low of over 4% today.

The U.S. Consumer Price Index (CPI) for October surprised the market after an  increase of 0.4% for the month and 7.7% from a year ago, which were lower than estimates. The consensus expected an increase of 0.6% for the month and 7.9% from last year.

Core inflation which excludes volatile food and energy costs rose 0.3% for the month and 6.3% on an annual basis. Both figures were also lower than the consensus for 0.5% and 6.5%.

The reading suggested that the Fed’s run of sharp interest rate hikes this year were starting to have the anticipated effect of lowering inflation. It also raised hopes that the Fed will slow the pace of rate hikes in the coming months.

According to data from CME, market expectations for a 50 bps hike by the Fed in December rose to over 80% chance from 56.8% the previous day. Peak interest rates in the U.S. are now expected to be lower than 5%.