The US dollar fell for a second straight day on Wednesday after a tame report on US inflation reinforced expectations the Federal Reserve will not raise interest rates further.
The greenback tumbled to its low for the day after government data showed the core consumer price index, excluding food and energy prices, rose 0.2 percent in July, below the median forecast of a 0.3 percent rise in a Reuters poll, and down from a rise of 0.3 percent last month.
Overall consumer price inflation for the July year slipped to 4.1 percent from 4.3 percent last month also.
Separate reports showed that the pace of US home building fell more than expected and industrial production undershot forecasts in the same month, supporting the view that the US economy is slowing.
US July producer prices reported on Tuesday also suggested inflation was slowing.
"Clearly over the last two days the US data has been the driver, as the PPI through to housing starts have not been good for the dollar", said Todd Elmer, currency strategist with Citigroup Global Markets in New York. "We have likely reached a peak in interest rates."
Late afternoon in New York, the euro was up 0.4 percent against the dollar at $1.2838 from about $1.2790, the level where it was shortly prior to the inflation data. The euro rose as high as $1.2865 on electronic trading system EBS, in sight of a two-month high of $1.2913 reached last week.
The dollar also dropped against the yen, trading down 0.2 percent at 115.84 yen. The euro was trading at 148.75 yen after earlier touching a record peak of 148.89 yen, according to EBS data.
The yen has suffered from expectations that the Bank of Japan will leave interest rates at 0.25 percent for some time after its first rate rise in six years last month.
Minutes from the BoJ's July 13-14 policy meeting released on Wednesday showed that some board members said the central bank should avoid suggesting it would be quick to raise rates.
Federal funds futures on the Chicago Board of Trade indicated a 24 percent chance that the Fed would raise rates again at its next meeting on September 20, down from a 30 percent chance just before the US inflation data was published on Wednesday, and down from a high of 48 percent earlier this week.
Alan Ruskin, chief international strategist at RBS Greenwich Capital in Connecticut, said the CPI data would "definitely provide another fillip for 'the Fed is done' camp," and added that it was difficult to find anything positive for the greenback in the numbers.
Still, some traders were wary that market positioning was already tilted so heavily against the dollar that there was a risk of a rebound in the currency.
"There is a risk of a dollar spike because of lethargic summer markets and near record dollar shorts," said one dealer with a US proprietary trading firm.
The Fed left interest rates on hold at 5.25 percent last week after raising them at 17 straight meetings since June 2004, and said that it expected a slowing down of US economic growth to moderate such inflationary pressures.
In contrast to the Fed, the European Central Bank has suggested it is likely to raise interest rates further in coming months. Some analysts also expect the Bank of England to raise interest rates again before year end.
On Wednesday Dallas Federal Reserve Bank President Richard Fisher said inflation is still the greatest threat to the US economy and policy makers will not hesitate to raise interest rates if incoming data shows it is necessary. Investors though remained unconvinced that event would be anytime soon.
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