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

The US dollar retreated on Thursday from the multi-month peak it reached in the immediate aftermath of a hotter-than-expected US inflation report, as a sharp decline in Treasury yields prompted traders to pare back bets on further Federal Reserve tightening.

The dollar index, which measures the US currency against a basket of major peers, was last down about 0.2% on the day at 102.03, having touched an 18-month high on Wednesday after US consumer price figures came in stronger than forecast. Other market reports put the index down roughly 0.4% at 102.16, with the move unwinding the prior session's gains.

The September Consumer Price Index had initially given the dollar a lift. Headline inflation accelerated to 3.7% year-on-year, while core CPI rose 0.3% month-on-month, above the 0.2% consensus and matching August's pace, according to analysts at OCBC cited by FXStreet. That combination revived concerns about sticky inflation and the possibility of renewed Fed tightening. With the CME FedWatch tool's implied probability of an October rate hike climbing toward 40% in the initial reaction, the dollar index rallied to its highest level since April 2025, near the 102.95-103.00 area.

That move proved short-lived. The benchmark 10-year US Treasury yield fell sharply the following session, losing close to 3% on the day to trade around 5.1%, removing a key support for the greenback. The retreat in yields coincided with a broader risk-off tone in equity markets.

MUFG currency analyst Lee Hardman attributed much of the reversal to positioning rather than a change in the inflation picture. He noted that the dollar weakened overnight, quickly giving back the gains made after the stronger-than-expected September CPI report, and said the pullback in US yields and the dollar appeared to be driven mainly by an unwind of AI-related trades that produced more risk-averse conditions. Hardman added that after record capital inflows into US equities encouraged by optimism over artificial intelligence, the price action highlighted the dollar's vulnerability to a correction when sentiment toward that theme sours.

The dollar's slip gave relief to the euro, which bounced 0.5% from an 18-month trough to $1.1216, putting it on course for its biggest daily gain in nearly two months. The Japanese yen firmed to 157.74 per dollar, while the offshore Chinese yuan was broadly steady at 6.6909 per dollar after data showed China's factory-gate inflation picked up last month as commodity costs rose.

Elsewhere in the G10 complex, the Australian dollar lagged the broader recovery against the greenback. Australian labour market data released earlier in the day showed the unemployment rate unchanged at 4.7% in September, while employment fell by 39,200, a weaker outcome than the roughly 20,000 decline economists had expected.

Attention now turns to the remainder of the US data calendar, which includes weekly initial jobless claims, the September Producer Price Index and retail sales figures. Those releases will give markets a further read on whether price pressures are broadening beyond the consumer basket and how resilient household spending remains, both of which feed into expectations for the Fed's next policy steps.

Currency markets often take their cue from relative interest-rate expectations, and this week's price action illustrates how quickly those expectations can shift. A firm inflation print pushed yields and the dollar higher one day; a risk-driven unwind in bonds and equities reversed much of it the next. Market participants will be watching upcoming data and central-bank commentary for clarity on which force dominates.

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This is a news summary for general information only — not financial advice, and nothing here is a recommendation to buy or sell any currency or metal. Exchange rates and gold prices can move sharply around data releases and central-bank decisions, and trading them carries a real risk of loss, which leverage magnifies. Always verify against the original source and do your own research before making a financial decision.