The US dollar falls to a one-week low as cautious remarks from Federal Reserve officials dampen interest rate hike expectations.

1. The US Dollar Index retreated from an 18-month high on Thursday, falling as much as 0.56% to 101.90 and hitting a one-week low. Although US inflation data was stronger than expected, cautious remarks from Federal Reserve officials and a decline in US Treasury yields prompted traders to reduce bets on a rate hike in October. Earlier, the Dollar Index had jumped to an 18-month high boosted by inflation data, but has since surrendered most of its gains.2. The euro rebounded 0.7% against the US dollar from an 18-month low to 1.1236, marking a four-day high; the pound rose 0.48% to 1.3256, recovering from a 13-month low.3. Data from the US Department of Labor showed that core CPI in September rose 0.3% month-on-month and 2.6% year-on-year, both higher than expected; overall CPI also rose more than expected on the year. After the data release, the market's expectation for a Federal Reserve October rate hike briefly surged to 50%, providing a short-lived boost to the dollar.4. However, as the October 27-28 meeting approaches, several officials including Federal Reserve Vice Chair for Supervision Bowman and San Francisco Fed President Daly said decisions could wait until the economic outlook becomes clearer. As a result, the market has reduced bets on a rate hike, and expectations for an October rate increase have now fallen back to around 25%.5. Khoon Goh, Head of Asia Research at ANZ, noted that although overall CPI was slightly higher than expected, the market believes the strength is not enough to force the Federal Reserve to act in October. He added that the October meeting is just days before the mid-term elections, which is one reason the market is reluctant to dramatically raise rate hike expectations.6. Rising US Treasury prices and falling yields further weighed on the dollar. The 10-year US Treasury yield dropped to 5.098%, a three-week low, while the 30-year yield stood at 5.455%. OCBC foreign exchange strategist Sim Moh Siong said the dollar's rally has lost momentum as yields retreated after a brief spike, weakening interest rate support for the dollar; the return of the traditional negative correlation between stocks and bonds has also limited further dollar gains.7. The market's focus will shift to the US Producer Price Index (PPI) and retail sales data due later in the day, with the PPI expected to reveal a clear rise in business cost pressures.