By John McCrank

NEW YORK (Reuters) – The U.S. dollar sank more than 1% against a basket of peers on Wednesday as weakening economic data firmed views that the Federal Reserve will slow the pace of its rate hiking cycle, sending the euro back above parity with the greenback for the first time in a month.

At 3:15 p.m. EDT (1915 GMT), the dollar was down 1.118% at 109.7 against a basket of six currencies, its weakest since Sept. 20.

The dollar’s decline came as the benchmark 10-year U.S. Treasury yield continued its descent from last week’s multi-year high of 4.338%, and was last down four basis points at 4.0317%.

“Broad dollar weakness and further but milder declines in U.S. Treasury yields than yesterday appear to reflect wishful thinking toward a Fed pivot next week,” said Derek Holt, head of capital markets at Scotia Economics.

The aggressive pace of Fed tightening this year, aimed at taming stubbornly high inflation, has turbo-charged the dollar.

Traders and economists predict a fourth-straight 75 basis-point interest rate increase next Wednesday, but there is growing speculation that the central bank will slow to half a point in December.

The view that the Fed could begin to pivot in December was reinforced by data on Tuesday that showed U.S. home prices sank in August as surging mortgage rates sapped demand.

Data on Wednesday showed that sales of new U.S. single-family homes dropped in September and data for the prior month was revised lower, supporting the view that Fed rate increases are already working to tap the breaks on the world’s biggest economy.

The European common currency was up 1.11% at $1.0079, its highest since Sept. 13.

Sterling also hit its highest since Sept. 13, surging 1.33% to $1.1625, extending the previous day’s 1.6% gain when markets took succour from Rishi Sunak becoming Britain’s prime minister.

“Optimism that Rishi Sunak and his team will restore stability and credibility in the UK is overshadowing the very difficult economic situation that he has inherited,” said Fiona Cincotta, senior financial markets analyst at City Index.

Elsewhere, the Bank of Canada hiked interest rates by a smaller-than-expected 50 basis points and said future increases would be influenced by its assessment of how tighter policy was working to slow demand and ease inflation.

The Canadian dollar initially fell against the U.S. dollar after the Bank of Canada decision, which was the second consecutive reduction in the size of rate rises after a 100 basis-point move in July and 75 basis points last month, but then firmed up again. The loonie hit a three-week high of 1.35105 earlier in the day.

The dollar slumped 1.55% against China’s offshore yuan, while the onshore yuan finished the domestic trading session at 7.1825 per dollar, the strongest close since Oct. 12.

Market participants became cautious after major state-owned banks were spotted selling the dollar in the previous session to stabilise the market, traders said, wondering if the yuan has reached its peak weakness for the time being. [CNY/]

The dollar also fell against the Japanese yen, sliding 1.11% to 146.290.

Cryptocurrencies extended their sharp rallies from the day before. Bitcoin was 4.45% higher at $20,981.

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