Dollar sags as weaker-than-expected U.S. inflation continues to weigh

© 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 Gertrude Chavez-Dreyfuss and Ritvik Carvalho

NEW YORK/LONDON (Reuters) - The dollar weakened against major currencies on Wednesday after softer-than-expected U.S. inflation data released on Tuesday eased short-term expectations about tapering of asset purchases from the Federal Reserve.

The dollar index last stood at 92.441, down about 0.3% on the day from Tuesday, when it dropped following the inflation data but then recovered on haven demand as stocks slid on Wall Street.

But the greenback trimmed losses after import prices fell unexpectedly in August and a higher-than-expected reading for the NY Fed's business survey.

The index, a measure of the dollar's value against six major currencies, has meandered between 92.3 and 92.9 over the past week as several Fed officials suggested the U.S. central bank could reduce its buying of debt securities by the end of the year, even after a much-weaker-than-expected payrolls report at the start of the month.

While elevated inflation has kept pressure on policymakers, data overnight showed the U.S. consumer price index, excluding the volatile food and energy components, edged up just 0.1% last month.

"The U.S. dollar is struggling to find a stronger sense of direction amidst all this because weak NFP (non-farm payrolls) and CPI (consumer price index) data appear to be denting Fed expectations, while investors also have to factor in the soft run in stocks — and the risk that softness might extend — which would support the U.S. dollar on haven flows," wrote Shaun Osborne, chief FX strategist, at Scotiabank in a research note.

The Federal Open Market Committee's (FOMC) two-day policy meeting next week should provide some clarity on the outlook for tapering and interest rates.

Tapering typically lifts the dollar as it suggests the Fed is one step closer to tighter monetary policy. It also means the central bank will be buying fewer debt assets, in effect reducing the number of dollars in circulation and increasing the currency's value.

Valentin Marinov, head of G10 FX research at Credit Agricole (OTC:CRARY), said the Fed could start preparing the ground for a very cautious policy normalization next week, potentially as soon as November.

In early New York trading, the euro rose 0.2% to $1.1825.

The dollar slipped to a four-week low of 109.14 yen, and last changed hands at 109.15, down 0.5%.

Meanwhile, the Chinese yuan and the Australian dollar were knocked lower after Chinese data showed factory and retail sales growth cooled more sharply than expected last month. [L1N2QH08P]

Adding to the broader China worries in financial markets was a media report that property developer China Evergrande Group will not be able to make interest payments on its debt next week.

The yuan extended its decline for the day to as far as 6.4433 yuan per dollar. The dollar was last down 0.1% at 6.4302 yuan.

The Aussie dollar sank as low as US$0.7301 for the first time in more than two weeks following China's data, but recovered to trade little changed on the day at US$0.7317.