The dollar hovered around a two-month low on Friday, after falling sharply on data showing U.S. inflation fell more than expected, with Treasury yields also falling as investors braced for a smaller interest rate hike by the Federal Reserve in December.

The dollar index and dollar index futures were flat on Friday after dropping 2.2% in the previous session to its lowest since mid-September. The yield on the 10-year U.S. Treasury note fell below 4% and hit a more than one-month low.

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Data for US Dollar Today


 

Data on Thursday showed U.S. CPI inflation grew 7.7% in October, the slowest pace in nine months. The reading suggested that a series of sharp interest rate hikes by the Fed this year are now starting to have their intended effect of lowering inflation. It also boosted expectations that the Fed will now slow the pace of rate hikes in the coming months.

Market expectations for a 50 basis point (bps) Fed rate hike in December jumped to more than 80% probability from the previous day's reading of 56.8%, data from exchange operator CME showed. Expectations for a US interest rate peak also fell below 5%.

The shift comes amid a growing number of Fed members expressing support for smaller rate hikes in the coming months to avoid damaging the economy. The central bank had also signaled that it was considering such a move during its meeting earlier this month.

Federal Reserve

But with inflation still well above the Fed’s 2% target, the central bank is unlikely to halt its hiking cycle anytime soon. Fed Chairman Jerome Powell has also hinted that interest rates could peak at a higher level than expected if inflation proves stubbornly stubborn.

"The Federal Reserve will continue to hike given that inflation remains well above target amid economic growth with a tight jobs market, but today's outcome strongly supports a "step back" to a 50bps hike at the December meeting," analysts at ING wrote in a note.

Risk-driven markets rallied on the prospect of a smaller hike in December, with Wall Street indexes rising sharply on Thursday.

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