NEW YORK, Aug 11 — The dollar extended its losses against other major currencies on Thursday, a day after a report showed US inflation was not as hot as anticipated in July, prompting traders to dial back expectations for rate hikes by the Federal Reserve going forward.

Investors slashed bets on the possibility that the Fed will raise interest rates by 75 basis points for a third consecutive time when it meets in September after data yesterday showed US consumer prices were unchanged in July.

Fed funds futures traders are now pricing in a 66 per cent chance of a 50 basis-point hike and a 34 per cent chance of a 75 basis-point increase in September.

That sent stock markets higher and the dollar broadly lower as traders readjusted their forecasts to factor in the chance that decades-high inflation may have peaked.


“Risk appetite has rebounded across the financial landscape on the prospect of less restrictive monetary policy from the Federal Reserve,” said Karl Schamotta, chief market strategist at Corpay.

The dollar index was down 0.257 per cent at 104.95 at 10:45 a.m. EDT (1445 GMT), after recording its biggest daily fall in five months, of 1 per cent, the previous day.

The greenback’s intraday drop was even larger, but it clawed back some of its losses after Fed officials attempted to temper expectations of significantly looser policy, with Neel Kashkari telling a conference on Wednesday that the central bank was “far, far away from declaring victory” on inflation.


“The loosening of financial conditions that is occurring across the global financial system is not in alignment of where Fed officials would like to take policy, so the reality for FX traders is that there may be a short horizon on market movements right now,” said Schamotta.

Data today showed that US producer prices unexpectedly fell in July amid a drop in the cost for energy products and that underlying producer inflation appears to be on a downward trend, while jobless claims rose for a second straight week in a labor market that remains tight.

The euro and Japanese yen were among the currencies to benefit from the dollar’s weakness and both added to the previous day’s gains.

The euro was last up 0.34 per cent at US$1.03345 (RM4.61).

The yen gained 0.22 per cent to ¥132.59 (RM4.45) per dollar after a rise of more than 1 per cent yesterday.

The reason for the yen’s strength is that the Bank of Japan has interest rates on hold indefinitely, said Marshall Gittler, head of investment research at BDSwiss Holding Ltd.

“If global inflation starts to slow, then other central banks may also cut back on their tightening plans, meaning that the expected interest rate gap between them and the US won’t narrow that much,” he said.

“But since Japan isn’t expected to raise rates at all, any change in US rate expectations has a one-to-one impact on the expected spread between US and Japan rates.” Sterling edged up 0.06 per cent versus the dollar to US$1.2224, after gaining more than 1 per cent the previous day. — Reuters