By Tom Westbrook
SINGAPORE (Reuters) - The dollar skidded to multi-month lows on Thursday after U.S. core inflation hit its slowest in three years and retail sales turned flat, which pulled forward expectations for rate cuts in the world's biggest economy.
Stocks and other risk-sensitive assets such as the Australian dollar led gains in the wake of the data release. The Aussie rose 1% overnight in its sharpest one-day jump for the year, and tacked on a further 0.1% in early Asia trade to hit a four-month high of $0.67. [AUD/]
The euro, which climbed 0.6% overnight, edged up to a two-month high at $1.0890. The New Zealand dollar hit a two-month high at $0.6131. Sterling made a one-month high at $1.2694.
The battered yen earned a reprieve and traded at its strongest on the dollar for a week at 154.25.
Core U.S. inflation slowed to an annualised 3.6% in April, Wednesday's data showed, in line with market expectations. That is well above the Federal Reserve's 2% goal, but since it eased from 3.8% a month earlier investors saw it as opening the way for a rate cut as soon as September or perhaps even earlier, as the U.S. presidential election looms in November.
"If we start to see a significant drop (in inflation) then I think last night was maybe the first step," said Bart Wakabayashi, Tokyo branch manager at State Street (NYSE:STT).
"The Fed probably has time until the next meeting to really have a good look at the data and make a strong decision ... I think that's what the market is reacting to right now."
Softer-than-expected retail sales figures, which were flat last month instead of the 0.4% gain that economists had forecast, reinforced the newfound confidence in rate cuts.
The data drove a rally in Treasuries and combined with selling in Japanese bonds, the gap between U.S. and Japanese 10 year yields has narrowed almost 20 basis points this week. [US/][JP/]
The yen lifted off recent cross-rate troughs a little too, pushing the Aussie back slightly from an 11-year peak on the yen.
The outlook for the yen remains shaky with data out earlier in the day showing the Japanese economy contracted more than expected in the first quarter, complicating the challenge for policymakers as they look to raise rates from near-zero levels.
Australian jobs data, U.S. initial jobless claims and speeches from European Central Bank policymakers highlight the day ahead.
The U.S. dollar index made its heaviest one-day percentage drop for the year so far overnight, falling 0.75% and through its 200-day moving average. It was at a five-week low of 104.17 in early Asia trade on Tuesday.
China's yuan rallied slightly in offshore trade to 7.2081 per dollar. Bitcoin regained a footing above its 100-day moving average and touched a three-week high of $66,695.