By Herbert Lash

NEW YORK (Reuters) -The dollar gained on Wednesday after still strong U.S. retail sales fell less than expected in October, a reminder for the market that a definitive date for the Federal Reserve to cut interest rates is still unknown.

The dollar bounced off its biggest drop in a year on Tuesday when the consumer price index (CPI) showed U.S. inflation was cooling faster than expected, sealing market expectations that the Fed was done hiking interest rates.

But at an annualized 3.2%, the pace of inflation remains well above the Fed’s 2% target, leaving the question of when the Fed will cut rates unresolved.

“Until the market believes that the next Fed move is going to be a cut and believes that concretely, we’ll see episodic patches of dollar strength before dollar weakness becomes the trade,” said Steven Englander, head of global G10 FX research at Standard Chartered (OTC:SCBFF) Bank in New York.

“Today’s data were neutral to slightly stronger than expected. The market is still not sure on U.S. growth.”

U.S. retail sales fell for the first time in seven months in October, the Commerce Department’s Census Bureau said, while producer prices posted the biggest decline in three-and-a-half years last month, according to the Labor Department’s Bureau of Labor Statistics.

More than 80% of the decline last month in the Producer Price Index for final demand goods was attributed to a 15.3% drop in gasoline prices, BLS said.

“The markets are anticipating rate cuts coming in the first couple of quarters next year,” said Roosevelt Bowman, senior investment strategist at Bernstein Private Wealth Management in New York.

“But in our view, we just don’t think that downward momentum in inflation is going to be nearly as fast as what the market is estimating,” he said.

The dollar index, a measure of the U.S. currency versus six others, rose 0.30%, off its two-month low of 103.98 on Tuesday. The euro was down 0.32% at $1.0844, after touching its highest since August the day before.

Investors have all but eliminated the likelihood of another rate hike when Fed policymakers meet in December, while bets of a rate cut in May 2024 increased to more than 65%, according to the CME Group’s (NASDAQ:CME) FedWatch Tool.

The fourth quarter in the past two years has not been good for the dollar, which peaked in the third quarter of both 2021 and 2022 and sold off through to January each year, said Brad Bechtel, global head of FX at Jefferies in New York.

“I’m not necessarily saying that history is going exactly to repeat itself, but I don’t necessarily want to be buying or getting long the dollar just yet,” he said. “We need to see more of this play out.”

Earlier in Britain, data showed inflation last month eased to 4.6%, its slowest pace in two years. The reading, below forecasts of 4.8%, prompted a reassessment of the outlook for Bank of England policy and dented sterling.

Sterling was last trading at $1.2408, down 0.71%. On Tuesday, the pound rose by 1.8% against the dollar, marking its biggest one-day gain in a year.

The Japanese yen weakened 0.66% at 151.37 per dollar.

Earlier in Japan, data showed the economy contracted in July-September, complicating the Japanese central bank’s efforts to ease out of its ultra-easy monetary policy. On Monday, the yen touched a one-year low close to 152.

The dollar was knocked back from the 152 level on Monday, after a routine options expiry unleashed some profit-taking that took the yen to around 151.20.

The offshore Chinese yuan, meanwhile, received some support The offshore yuan, meanwhile, briefly ticked up to a three-month high of $7.2385 against the dollar after domestic industrial output and retail sales growth beat expectations.

Evidence of ongoing weakness in China’s property sector, where data showed sales fell faster in October and investment in real estate slumped, took some of the shine off the rally.

The offshore Chinese yuan rose 0.10% versus the greenback at $7.2585 per dollar.

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