Investing.com - The dollar retreated on Thursday after hitting almost nine-month highs in the previous session amid hopes for a U.S. interest rate hike in the near-term, while sterling regained ground as expectations for a rate cut next week diminished.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was last at 98.51, after hitting highs of 99.09 overnight, its highest level since February 1.
The index has rallied so far this month as hawkish remarks by Fed officials in recent weeks solidified expectations for a rate hike before the year’s end.
Expectations for higher interest rates typically boost the dollar by making the currency more attractive to yield-seeking investors.
The Fed’s next meeting is in November, but a rate hike ahead of the presidential election is seen as unlikely.
Investors currently price a 68.4% chance of a rate hike at the Fed's December meeting; according to federal funds futures tracked Investing.com's Fed Rate Monitor Tool.
Investors were turning their attention to data on U.S. third quarter growth due for release on Friday for further cues.
The pound recovered to trade above the $1.22 level, with GBP/USD up 0.14% to 1.2206.
Sterling fell to a low of 1.2083 on Tuesday, the lowest level since the flash-crash earlier this month, before rebounding after Bank of England Governor Mark Carney said the bank could not ignore the pound's "fairly substantial" drop since the June 23 Brexit vote.
The comments were seen as an indication that the BoE will leave rates unchanged at its meeting next week.
The euro strengthened, with EUR/USD climbing 0.31% to 1.0923, pulling away from Tuesday’s eight-month trough of 1.0850.
The dollar was little changed against the yen, with USD/JPY at 104.19, holding below the six-month high of 104.86 set on Tuesday.
Elsewhere, the Australian dollar rose half a cent after data showing a stronger than expected rebound in underlying inflation in the third quarter quashed expectations for a near-term interest rate cut by the country’s central bank.
AUD/USD hit highs of 0.7709 and was last at 0.7683, up 0.5% for the day.
Subdued inflation readings in the first and second quarters had prompted the Reserve Bank of Australia to cut interest rates in May and August, bringing rates to a record low 1.5%.