Dollar falls on cooler-than-expected U.S. inflation data

© Reuters. FILE PHOTO: U.S. One dollar banknotes are seen in front of displayed stock graph in this illustration taken, February 8, 2021. REUTERS/Dado Ruvic/Illustration/

By John McCrank

NEW YORK (Reuters) - The dollar fell broadly on Wednesday, with its biggest decline against the yen since March 2020, following a cooler-than-expected inflation report for July that raised expectations of a less aggressive rate hike cycle than previously anticipated from the U.S. Federal Reserve.

U.S. consumer prices did not rise in July as the cost of gasoline plunged, delivering the first notable sign of relief for Americans who have watched inflation climb over the past two years.

Economists polled by Reuters had forecast a 0.2% rise on the heels of a roughly 20% drop in the cost of gasoline.

The dollar index, which measures the currency's value against a basket of currencies, was down 1.448% at 104.81 at 11:30 a.m. Eastern time (1530 GMT).

"This is good news for FX traders, as it was a pretty clear reaction and you will probably see that there still should be some follow-through," said Edward Moya, senior market analyst at Oanda.

The dollar was down 1.99% versus the yen, to 132.45 yen, with the greenback on track for its biggest daily fall against the Japanese currency since March 2020 around the start of the pandemic.

"In a backdrop where the market is becoming more content with FF (Fed funds) pricing, the yen's worst days appear to be over," analysts from TD Securities said in a client note. "A broad 130-135 range may be the new normal."

The Fed has indicated that several monthly declines in CPI growth will be needed before it lets up on the increasingly aggressive monetary policy tightening it has delivered to tame inflation currently running at four-decade highs.

Still, traders of futures tied to the Fed's benchmark rate slashed bets on a third straight 75-basis-point hike in September following July's inflation numbers, to a now see a half-point increase. They now expect the Fed to raise rates to a range of 3.25%-3.5%, compared to a range of 3.5%-3.75% or higher previously, to bring decades-high inflation under control.

"What you are seeing is the market enjoying the possibility of the Fed moving toward a less hawkish, not dovish, but slightly less hawkish stance," said Quincy Krosby, chief global strategist at LPL Financial (NASDAQ:LPLA).

The euro climbed 1.34% to $1.0349, on track for its biggest one-day rise against the dollar since March 9, while sterling gained 1.5% to $1.2256, its best single-day performance since mid-June.

A quick reading on policymakers' reaction may come from Fed officials Charles Evans and Neel Kashkari, who were due to make speeches at 1500 GMT and 1800 GMT, though they will have another set of price data in August before September's policy meeting.

The Australian dollar, seen as a barometer of risk, was up 1.9% at $0.70945.

Bitcoin, rattled by a drumbeat of cryptocurrency fund wipeouts and thefts over recent months, was up 3.61% at $24,000.