The dollar fell across the board on Tuesday after data revealed that consumer price inflation in the U.S. climbed less than expected last month, bolstering predictions that the Federal Reserve will pause the pace of rate rises following its two-day meeting on Wednesday.
Following four straight 75-basis-point hikes, the Federal Reserve of the U.S. is widely predicted to raise interest rates by 50 basis points.
The dollar index, which measures the U.S. currency against six major currencies, lost 0.067% to 104.000 after falling 0.9% overnight.
Near the session's six-month high of $1.06730, the euro was up 0.03% against the dollar at $1.0633.
Sterling was last trading at $1.2351, down 0.02% on the day, while the Japanese yen gained 0.09% to 135.45 per dollar.
The smallest annual inflation gain in nearly a year was seen in November, according to data, as gasoline and used automobiles increased in price moderately on an annual basis. The CPI increased 7.1% in the twelve months ending in November, the weakest increase since December 2021, after increasing 7.7% in October.
According to Carol Kong, a currency analyst at Commonwealth Bank of Australia, the FOMC should reduce the increase in the Funds rate to 50 basis points in light of the slowdown in CPI inflation.
"We expect FOMC Chair Powell at his press conference to talk about the risks to economic growth as well as the need to bring inflation down to target," Kong said.
The CPI gained 0.2% last month after climbing 0.3% in October, excluding volatile food and energy components. The core CPI rose 6.0% in the year to November after rising 6.3% in October.
Traders are also banking on a 25-basis-point increase at each of the Fed's first two meetings in 2023, with the last boost perhaps coming in May rather than March.
"This would represent a further deceleration in rate hikes and brings closer the interest rate difference between the dollar and other currencies because other countries are hiking too," Ivan Asensio, head of FX risk advisory at Silicon Valley Bank in San Francisco, said.
Fed funds futures have already factored in a lower terminal rate, whereby by March the Fed stops raising rates just below 5%. Traders are now predicting rises of 25 basis points at each of the Fed's first two meetings in 2023 and no more.
