Dollar pulls back from 18-month high as Treasury yields fall; Fed hike bets ease

By Jiaxing Li and Sophie Kiderlin

LONDON/HONG KONG, Oct 15 (Reuters) - The dollar slipped from an 18-month peak on Thursday in choppy trading as a sharp drop in Treasury yields 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, was last down 0.2% on the day at 102.03, having hit an 18-month high on Wednesday after US inflation figures came in stronger than expected.

That helped the euro bounce 0.5% from an 18-month trough to $1.1216, putting it on track for its biggest daily gain in nearly two months. Sterling strengthened 0.5% to $1.3253, remaining broadly steady after data showed that Britain's economy unexpectedly grew 0.1% in August. 

Markets turned risk-off as the hot US 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 5.0892% while the 30-year yield dipped to 5.4319%, both touching around three-week lows. 

As well as the moves in bond yields and jittery equities, with tech stocks especially taking a hit, Kit Juckes, chief FX strategist at Societe Generale, also noted that shifts in positioning played a role in the dollar's moves.

"The overall picture is I think one of a little bit of a tug of war between people who would like to look for a correction in the dollar. Because positioning's too big, we've come a long way, there's not really much new news, we've got a lot of rate hikes priced in and so on. And then the economic data, which can flip it," he said. 

"I suspect it'll be choppy and uncomfortable until we've got past the retail sales and PPI numbers." 

Both data points are due later in the day, with producer prices expected to show a jump in business costs last month. 

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." 

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 $0.6930, down 0.6%, after local employment unexpectedly slid in September. 

The Japanese yen strengthened to 157.74 per dollar and the offshore yuan was last broadly steady at 6.6909 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 Thomas Derpinghaus and Andrew Cawthorne)