Dollar retreats from 18-month high as Treasury yields dip; Fed hike bets ease

(Corrects the date for Warsh's IMF speech in paragraph 12 to Friday from Thursday)

By Jiaxing Li

HONG KONG, Oct 15 (Reuters) - The dollar slipped from an 18-month peak on Thursday as a sharp drop in Treasury yields amid a risk-off mood weighed on the greenback, while cautious remarks from Federal Reserve officials tempered October hike expectations despite hot inflation data.

The dollar index, which measures the US currency against a basket of peers, fell 0.2% to 101.99, giving back most of the gains it made after Wednesday's stronger-than-expected inflation figures pushed it to an 18-month high.

That helped the euro bounce 0.6% from an 18-month trough to $1.1223, putting it on track for its biggest gain in nearly two months. Sterling strengthened 0.4% to $1.3250, recovering from a 13-month low.

Markets turned risk-off as the hot CPI reading bolstered bets on higher-for-longer Fed rates and revived worries about AI companies' heavy debt burdens, driving safe-haven flows into Treasuries.

The rally in US government bonds pushed the benchmark 10-year yield to 5.0933% while the 30-year yield dipped to 5.4462%, both touching three-week lows.

"The dollar has gone down in a hurry ... we think the biggest factor has been the decline in 30-year yields," said Rodrigo Catril, senior FX strategist at National Australia Bank.

"If the decline in yields were to extend, the dollar could struggle, but at this stage it would suggest that the dollar is probably going to consolidate" with expectations for Fed hikes still high, he added.

Market pricing for an October Fed rate hike rose sharply to 50% on the back of the CPI data, before a chorus of Fed officials - including Vice Chair for Supervision Michelle Bowman and San Francisco Fed President Mary Daly - said the central bank could wait for a clearer picture ahead of the October 27 and 28 meeting, tempering those bets.

"Despite the whole CPI number coming slightly stronger than expected, I think markets have sort of taken the view that maybe it was not hot enough to force the Fed's hand for October," said Khoon Goh, the head of Asia research at ANZ.

"(The) October (meeting) is also just a few days before the midterm elections as well," he added. "And that's possibly why the market doesn't want to be more aggressive in pricing in for October."

The market's focus will now shift to US producer price and retail sales data later in the day, with the former expected to show a jump in business costs last month.

Investors will also watch remarks from Fed officials including Chair Kevin Warsh at IMF-World Bank annual meetings in Bangkok on Friday for clues on the US central bank's next move.

The Australian dollar fetched $0.6952, down 0.3%, after local employment unexpectedly slid in September. The kiwi traded up 0.6% at $0.5626.

The Japanese yen strengthened to 157.675 per dollar and the Swiss franc was about 0.8% stronger at 0.8282.

Elsewhere, the offshore yuan strengthened a touch to 6.6926 per dollar after data showed China's factory-gate inflation heated up last month as commodity costs rose.

(Reporting by Jiaxing Li in Hong Kong; Editing by Shri Navaratnam and Thomas Derpinghaus)