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Dollar holds drop as US inflation damps Fed hike bets

Singapore - The dollar held a two-day decline after a core US inflation gauge rose less than forecast in September, prompting traders to reduce bets the Federal Reserve will raise interest rates this year.

The currency has weakened against all of its 16 major counterparts this week as futures pricing indicates a gradual pace of interest-rate increases by the US central bank amid mixed signals from the world’s largest economy.

The Australian and New Zealand dollars pared gains on Wednesday following disappointing industrial output data from China, their biggest trading partner.

“Some of the bullishness in the dollar has faded into this week,” said Vishnu Varathan, a senior economist at Mizuho Bank Ltd. in Singapore. “With core inflation coming in slightly below expectations and certainly decelerating from August, it feeds into not wanting to chase the dollar higher prematurely.”

The Bloomberg Dollar Spot Index, which measures the US currency against 10 major counterparts, was little changed at 07:58, following a 0.5% decline in the previous two days. The greenback bought ¥103.80 compared with ¥103.87 on Tuesday.

Odds narrow

The dollar index reached the highest since March last week amid speculation the Fed was getting closer to raising interest rates.

Traders see about a 63% probability the central bank will tighten policy by December, down from 66% a day earlier. A Labour Department report showed consumer prices excluding volatile food and energy costs rose 0.1% from a month earlier.

“While I expect the US dollar to strengthen through the end of the year, I’m not sure that it moves appreciably beyond the end of this year,” Robert Rennie, head of financial markets strategy in Sydney at Westpac Banking, said in a briefing in Singapore.

While the Fed is likely to tighten in December, June and the end of 2017, there’s a risk the central bank will move at a more gradual pace because of political uncertainties, including the US elections and Brexit, he said.

The Aussie was little changed at 76.73 US cents, after climbing as much as 0.3% to 76.91. The currency surged 1.7% in the previous five days. The kiwi climbed 0.3% to 72.13c. It reached a session high of 72.35c after the average price for whole milk powder rose at the latest GlobalDairyTrade auction.

China’s industrial output increased 6.1% from a year earlier in September, compared with analysts’ median projection for a 6.4% rise. Gross domestic product rose 6.7% in the third quarter from a year earlier, matching a projection by economists Bloomberg surveyed and smack in the middle of the government’s 2016 goal of 6.5% to 7% growth.

“The industrial production data has taken the top of the Aussie and kiwi rallies,” said Ray Attrill, global co-head of foreign exchange strategy at National Australia Bank in Sydney. “But the damage is likely to remain mild amid the slightly softer dollar backdrop.”

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