Dollar sinks ahead of US inflation test

US dollar rate index news: The dollar languished near a more than four-month low on Friday ahead of a reading on a key US inflation gauge due later in the day, which will provide further clarity on how much room the Federal Reserve has to cut interest rates next year.

The greenback hit a five-month trough against the New Zealand dollar and a three-week low against the euro in early Asia trade, resuming its decline after a sudden bout of risk aversion in New York hours on Wednesday led to a selloff in US stocks and a rise in the dollar.

The kiwi was last 0.03 per cent higher at $0.6296 after hitting a session high of $0.6298, while the euro peaked at $1.10125.

Focus now turns to Friday's US core personal consumption expenditures (PCE) print - the Fed's preferred measure of underlying inflation - for clues on how far inflation in the world's largest economy is slowing.

Expectations are for the core PCE price index to have risen 3.3 per cent on an annual basis, as compared to October's 3.5 per cent.

"The distribution for US inflation is now considered skewed and one-sided, with a high probability of lower levels," said Chris Weston, head of research at Pepperstone.

"Hence, the Fed has increased scope to ease policy should the need arise, and while Fed officials are saying their work is not done, and the last push to get to its 2 per cent inflation target is the hardest part, they can front load cuts far more efficiently when core PCE is at 3.5 per cent and falling."

Against a basket of currencies, the greenback was last at 101.76, pinned near a more than four-month low of 101.72 hit in the previous session.

The dollar index was on track for a weekly loss of about 0.8 per cent and looked set to extend last week's 1.3 per cent decline, after the Fed left the door open to rate cuts next year at its last policy meeting for 2023.

The Australian dollar dipped 0.09 per cent to $0.6797, though remained not too far from its five-month high of $0.68035 first hit on Thursday.

Sterling was little changed at $1.26905 and was headed for a marginal weekly gain, pressured by British inflation data out this week that came in well below expectations.

"As inflation edges closer to target, the market will have an increased tendency to disregard hawkish comments from policymakers," said Jane Foley, senior FX strategist at Rabobank. "This is likely to be particularly the case in the UK in view of the weakness of the economic outlook."

In Asia, the yen last stood at 142.09 per dollar, unfazed by Friday's data that showed Japan's core consumer prices rose 2.5 per cent in November from a year earlier, marking the slowest pace of increase in over a year and taking pressure off the Bank of Japan (BOJ) to phase out its massive stimulus.

The Japanese currency looked set to end the week largely unchanged, after the BOJ had, earlier this week, maintained its ultra-loose policy settings and offered few hints on when it could move away from negative interest rates.