Dollar down as markets bet Fed done with hikes

The dollar stuttered at broadly lower levels on Wednesday after slumping overnight as a surprisingly softer U.S. inflation reading bolstered bets that the Federal Reserve has reached the end of its monetary tightening cycle. The sell-off in the dollar drove a rally for many of its peer currencies, with the euro sitting just below an over two-month high hit on Tuesday.

The frenetic currency market activity was sparked by data showing U.S. consumer prices were unchanged in October, with the annual rise in underlying inflation the smallest in two years. In the 12 months through October, the CPI climbed 3.2 per cent - below economists' estimates - after rising 3.7 per cent in September.

The data prompted market participants to all but eliminate the chance of another rate hike at the Fed's December monetary policy meeting, while bets of a rate cut in May next year increased to around 50 per cent, according to the CME Group’s FedWatch Tool.

Traders reacted quickly to the shift in market pricing by sending the dollar tumbling 1.5 per cent overnight against major currencies. At the same time, U.S. Treasury yields, which have helped to boost the greenback, tumbled.

The dollar index, which measures the currency against a basket of peers, last stood at 104.13 in the Asian morning, just off Tuesday's two-month low of 103.98.

With the dollar on the back foot, the euro settled around $1.0873 after touching its highest since August the previous day.

The pound was fetching $1.2484, around levels last seen in September.

The market reaction was large in comparison with only a modest downside surprise, said Kyle Rodda, senior financial market analyst at Capital.com.

"It makes sense for the markets to price out further Fed hikes at the margins, but to practically price them out entirely and double down on expectations for cuts next year is very bold," he said.

The greenback's overnight fall saw some relief for the languishing yen, which eased off Monday's fresh one-year low of 151.92.

That relief seemed temporary, however, with dollar/yen last around 150.54, creeping up slightly from Tuesday's close.

Elsewhere, the Australian dollar was 0.2 per cent lower versus the greenback at $0.64925, even as data showed an increase in wages was the largest on record last quarter.

The kiwi was flat at $0.6008.