US Dollar slips on underlying moderate PPI data

The US Dollar (USD) slid on Wednesday after hotter-than-expected data on U.S. producer prices showed underlying inflation moderated a bit more in September, providing further evidence for the market to reason the Federal Reserve is done hiking interest rates.

The producer price index (PPI) for final demand rose 0.5% after accelerating by an unrevised 0.7% in August. Economists polled by Reuters forecast the PPI to gain 0.3%. Over the past 12 months the PPI increased 2.2% after advancing 2.0% in August.

But after stripping out food, energy and trade services, PPI gained 0.2% last month, the same margin as in August. In the 12 months through September, the so-called core PPI increased 2.8%, or less than a 2.9% advance in August.

“There’s optimism that the disinflation process is still intact despite some of the hot numbers that we got today,” said Edward Moya, senior market analyst at OANDA in New York, adding that building material margins had impacted the data.

“The market has really become confident that the Fed could be done raising rates” after a “steady dose of dovish Fed speak” this week, Moya said.

The dollar index , which tracks the U.S. currency against six others, touched a two-week low of 105.550, while the euro rose to its highest since Sept. 25 at $1.0634.

The dollar’s weakness came from another decline in Treasury yields as bond prices rallied on the Fed’s recent softer stance on future rate hikes. Bond yields move opposite to their price.

The yield on 10-year Treasuries was last down 5.2 basis points at 4.604%, an almost 30 basis point drop from a 16-year high of 4.887% last Friday after a strong jobs report.

Investors await the release of minutes later on Wednesday from the last Fed meeting of policymakers, and a key inflation print on Thursday for direction on the future path for rates.

Investors also are keeping a close eye on the conflict between Israel and Palestinian Islamist group Hamas, which drove safe-haven market moves earlier in the week.

On Tuesday, Atlanta Fed Bank President Raphael Bostic said the central bank did not need to raise borrowing costs any further, while Minneapolis Fed President Neel Kashkari said it was “possible” that further hikes might not be needed.

Sterling rose to a three-week high of $1.2337 and was last up 0.2% at $1.2309. The euro was up 0.17% at $1.0624.

Euro zone households see inflation staying slightly above the European Central Bank’s (ECB) 2% target for another three years, an ECB survey on Wednesday showed, as rate-setters struggle to convince the public their plans to tame prices are on track.

The ECB has made “important progress” in getting inflation back down to target but there is still a long road ahead and a further rate hike cannot be ruled out, Dutch central bank chief Klaas Knot said on Wednesday.