Dollar sags as Fed seen tilting less hawkish, euro back above parity

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By John McCrank and Alun John

NEW YORK (Reuters) -The euro rose back above parity against the dollar for the first time in a month on Wednesday after poor U.S. economic data reinforced speculation that the Federal Reserve will slow its interest rate hikes, sending the greenback tumbling.

The European common currency rose as high as$1.0048, the highest since Sept. 20, and was last up 0.5% at $1.0019.

Sterling rose to 0.79% to $1.1563, its highest since Sept. 14, extending the previous day's 1.6% gain when markets took succour from Rishi Sunak becoming Britain's prime minister, and the dollar also fell against the Japanese yen, sliding 0.83% to 146.715.

At 10:35 a.m. EDT (1435 GMT), the dollar was down 0.595% at 110.28 against a basket of six peer currencies.

The dollar's softening came as the benchmark 10-year U.S. Treasury yield continued its descent from last week's multi-year high of 4.338%, and was last down four basis points at 4.069%.

Fed officials have begun sounding out their desire to slow the pace of increases soon, according to a Wall Street Journal report on Friday that caused markets to reprice.

"Broad dollar weakness and further but milder declines in U.S. Treasury yields than yesterday appear to reflect wishful thinking toward a Fed pivot next week," said Derek Holt, head of capital markets at Scotia Economics.

"Don't hold your breath," he said.

The aggressive pace of Fed tightening this year, aimed at taming stubbornly high inflation, has turbo-charged the dollar.

Traders and economists predict a fourth straight 75 basis-point interest rate increase next Wednesday, but there is a growing view that the central bank will slow to half a point in December.

The view that the Fed could begin to pivot in December was reinforced by data on Tuesday that showed U.S. home prices sank in August as surging mortgage rates sapped demand.

Data on Wednesday showed that sales of new U.S. single-family homes dropped in September and data for the prior month was revised lower, supporting the view that Fed rate increases are already working to tap the breaks on the world's biggest economy.

Elsewhere, the Bank of Canada hiked interest rates by a smaller-than-expected 50 basis points and said future increases would be influenced by its assessment of how tighter policy was working to slow demand and ease inflation.

The Canadian dollar fell to 1.36505 per U.S. dollar after the Bank of Canada decision, which was the second consecutive reduction in the size of rate rises after a 100 basis-point move in July and 75 basis points last month. The loonie had firmed to a three-week high of 1.35105 earlier in the day.

The dollar slumped more than 1.3% against China's offshore yuan, while the onshore yuan finished the domestic trading session at 7.1825 per dollar, the strongest close since Oct. 12.

Market participants became cautious after major state-owned banks were spotted selling the dollar in the previous session to stabilise the market, traders said, wondering if the yuan has reached its peak weakness for the time being. [CNY/]

Cryptocurrencies extended their sharp rallies from the day before. Bitcoin was 4.45% higher at $20,981.