Dollar retreats from 18-month high despite strong inflation data

By Laura Matthews and Sophie Kiderlin

NEW YORK/LONDON, Oct 15 (Reuters) - The dollar retreated from an 18-month peak on Thursday as investors looked past strong US inflation and spending data to focus on a shakeout in the securities of AI data center firms.

US producer prices rose by the most in 4-1/2 years in September as goods and services costs increased, adding to evidence that inflation pressures are spreading beyond energy.

Retail sales rose more than expected last month, lifted by higher gasoline prices, while weekly jobless claims marginally increased, pointing to resilient consumer demand and a stable labor market.

But government bonds rallied and the dollar pulled back, reflecting cautious remarks from Federal Reserve officials that further cooled expectations for an October interest-rate hike.

"The hotter (producer prices) print reinforces the inflation concerns raised by CPI, but our view remains that much of the associated Fed hawkishness is already priced in, leaving limited room for further upside in US yields and the dollar," said Joel Kruger, a market strategist at LMAX Group in London.

AI COMPANIES' DEBT BURDENS

The dollar index , which measures the US currency against a basket of peers, fell 0.44% to 102.00, having hit an 18-month high on Wednesday after US inflation figures came in stronger than expected.

That helped the euro bounce 0.48% from an 18-month trough to $1.1210, putting it on track for its biggest daily gain in nearly two months. Sterling strengthened 0.45% to $1.3251 after data showed Britain's economy unexpectedly grew 0.1% in August.

Markets grew choppy after Wednesday's hot US CPI reading initially bolstered bets on higher-for-longer Fed rates, while renewed concerns over AI companies' heavy debt burdens fuelled safe-haven flows into Treasuries.

"The selloff in chip stocks offers support to bonds, helping keep yields in check despite the inflationary signals," said Uto Shinohara, senior investment strategist at ⁠Mesirow Currency Management.

Traders now see a 72% chance that the Fed will leave rates unchanged at its October 27-28 meeting, compared with 53% a month ago, CME Group's FedWatch Tool showed.

The likelihood seen of a hike rose sharply after the CPI report, but bets eased after Fed officials including Vice Chair for Supervision Michelle Bowman and San Francisco Fed President Mary Daly said the central bank could wait for more clarity before the meeting.

"FX markets are currently taking a break from the USD rally that began in mid-September, boosted by faith that the Federal Reserve was willing to hike interest rates to fight inflation," said Juan Perez, director of trading at Monex USA in Washington.

"If those tools are not working, then the worry is about stubborn 'stagflation'."

Investors will also watch remarks from Fed officials including Chair Kevin Warsh at IMF-World Bank annual meetings in Bangkok on Friday for clues on the US central bank's next move.

The Australian dollar weakened 0.88% to $0.6911, after local employment unexpectedly slid in September, while the Japanese yen strengthened 0.32% to 157.82 per dollar.