Dollar on back foot as softer US inflation dims Fed hike bets

By Samuel Indyk and Jiaxing Li

LONDON, July 15 (Reuters) - The dollar was steady on Wednesday after falling the day before as softer-than-expected inflation data curbed bets for a near-term rate hike from the Federal Reserve, despite concerns that elevated oil prices could fuel inflation risks. 

Against the yen, the dollar fetched 162.24. The euro and the British pound both gained about 0.1%, trading at $1.1428 and $1.3406, respectively.

The U.S. dollar index, which measures the currency against a basket of six peers, was flat at 100.9. It fell 0.4% in the previous session for its biggest pullback in nearly two weeks, dragging it down from the highest levels since July 2.    

U.S. consumer inflation slowed more than expected to 3.5% on a year-on-year basis in June, data showed on Tuesday. The headline consumer price index fell 0.4% over the month, the first decline since April 2020, as energy prices retreated.

U.S. Treasury yields fell after the surprisingly soft data dampened market expectations for a near-term rate hike from the Fed, with yields on 2-year U.S. Treasuries off nine basis points from a 16-month high. 

"The market was building a conviction that the Fed was going to hike in September and it's certainly injected a bit of doubt into that now," said Chris Turner, head of global markets at ING. 

Turner added the Fed would probably need to see further soft inflation prints before completely ruling out a rate hike later this year. 

"Short-term, these Fed tightening expectations are going to hang around a bit ... so I think the dollar can stay stable, depending on what happens with energy prices."

New Fed Chair Kevin Warsh said during his testimony before the House Financial Services Committee on Tuesday that the central bank has "no tolerance" for persistently elevated inflation, and vowed to "do my job" if challenged by U.S. President Donald Trump.

Traders were now pricing in about a 65% chance of a rate hike in September, with any tightening later this month all but ruled out, according to LSEG data.

EYES ON THE MIDDLE EAST

In the Gulf, the latest escalation in hostilities in the Iran conflict pushed oil prices back to one-month highs, keeping inflation risks alive. 

Trump on Tuesday reimposed a naval blockade of all Iranian ports, while the U.S. military said it had begun a fresh round of strikes "to continue degrading Iranian capabilities used to attack commercial shipping in the Strait of Hormuz." 

Elsewhere, Norway's crown softened against both the euro and the dollar after core inflation eased more than expected in June, reducing pressure on the central bank to raise rates next month. 

The New Zealand dollar was well bid at $0.5815, hovering around its strongest level in a month, and the Australian dollar inched up to $0.6985. 

China's second-quarter economic growth slowed sharply to 4.3%, its lowest level in more than three years. The yuan briefly firmed to a one-month high as the data reinforced expectations for additional policy support measures.

(Reporting by Jiaxing Li; Editing by Shri Navaratnam, Kevin Buckland and Kate Mayberry)