By Herbert Lash

NEW YORK (Reuters) – The dollar fell sharply on Thursday after U.S. consumer prices rose less than expected in October to suggest underlying inflation is cooling, data that Wall Street cheered as it may allow the Federal Reserve to get less aggressive with interest rate hikes.

The data boosted other currencies against the dollar. The Japanese yen at one point climbed to its biggest single-day rise since 2008 and the British pound notched its biggest daily advance since 1985.

The annualized increase in headline inflation slid below 8% for the first time in eight months. The U.S. Treasury market rallied, pushing down the yield on the benchmark 10-year note which was on pace for its largest daily decline since March 2009.

Equity markets soared, with the Nasdaq surging more than 7%. But Cleveland Fed President Loretta Mester indicated it was too early to sound the all-clear, saying the main risk to inflation is that the U.S. central bank does not hike rates enough.

The softer-than-expected inflation was a tailwind for markets, said Art Hogan, chief market strategist at B. Riley Wealth in New York.

“Every line of the report shows sequential improvement,” Hogan said. “Inflation is clearly moving in the right direction, and that keeps a more hawkish Fed at bay,” he said.

The consumer price index rose 0.4% in October to match the prior month’s increase, the Labor Department said. Economists polled by Reuters had forecast the CPI would advance 0.6%.

Excluding volatile food and energy components, the CPI increased 0.3% on a month-over-month basis after gaining 0.6% in September.

US inflation and bond yields

“The CPI report has reinforced the sell-off momentum in the dollar,” said Lee Hardman, a currency strategist with MUFG in London.

The dollar has surged more than 16% this year, gains that exacerbated its decline on Thursday. The spike higher in the yen versus the dollar stirred speculation the Bank of Japan intervened, which analysts doubted.

“I think this reflects the data. I seriously doubt this is any sort of coordinated intervention move,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

The dollar’s drop was due to the decline in Treasury yields, said George Goncalves, head of U.S. macro strategy at MUFG Securities Americas.

“Everything is reacting to the sharp declines we’re seeing in rates,” Goncalves said. “This has been a strong dollar regime. Now people are having a change of heart today” in their view of the market, he said.

Fed funds futures priced in a drop in expectations for the U.S. central bank’s peak target rate, which fell below 5%. The likelihood of a 50-basis-point rate hike by the Fed instead of a 75-basis-point increase in December rose to 71.5%.

The Cleveland Fed’s Mester said that monetary policy needed to become more restrictive and remain restrictive for a while to put inflation on a sustainable downward path to the U.S. central bank’s target of 2%.

Annual inflation slowed as big increases last year dropped out of the calculation for the index. CPI rose 7.7% in October on a year-over-year basis, down from 8.2% in the prior month, as headline inflation fell below 8% for the first time since February.

The surprise downside in headline and core CPI provides further evidence the economy is past peak inflation, said Joseph LaVorgna, chief U.S. economist at SMBC Nikko Securities.

While the Fed remains on track to raise rates by 50 basis points in December, hikes in 2023 are in doubt because history shows the pace at which inflation declines always mirrors its prior moves higher, LaVorgna said in a note.

The euro rose 1.93% to $1.0204, while the yen strengthened 3.94% versus the dollar at 140.92 and sterling traded at $1.1714, up 3.15% on the day.

A crisis in the crypto world also hurt investor sentiment, analysts said. The Binance exchange on Wednesday abandoned a bailout deal of rival FTX, leaving FTX Chief Executive Sam Bankman-Fried scrambling to explore all options, with his company on the brink of collapse.

Bitcoin rose 11.76% to $17,744.00 after plunging in the previous session to less than $16,000 for the first time since late 2020. It has tumbled more than 60% this year.

FTX’s native token, FTT, rose 153% on the day at $3.826, though its month-to-date loss was about 85%.

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