Investing.com -- The U.S. Dollar Index fell sharply to a two-month trough on Tuesday, extending previous losses over the last week, as investors reacted to soft inflation figures and hints from a top Federal Reserve policymaker that it could be appropriate to raise interest rates in the coming months.
The Index, which measures the strength of the dollar versus a basket of six other major currencies, fell more than 0.90% to an intraday low of 94.38, before rallying slightly to 94.75 at the close of U.S. afternoon trading. The dollar is on pace for its third straight losing session and its fifth loss over the last six trading days. At session-lows on Tuesday, the index fell to its lowest level since June 9.
On Tuesday morning, the U.S. Bureau of Labor Statistics said its Consumer Price Index remained flat in July, in line with consensus forecasts, falling back slightly from a monthly gain of 0.2% in June. On an annual basis, consumer inflation rose by 0.8% from the previous 12 months, also slowing from June's yearly increase of 1.0%. It came as food prices remained flat and transportation experienced a slight contraction, offset by strength in medical and housing prices.
At the same time, Core CPI, which strips out volatile food and energy prices, rose by 0.1% in July, slightly below analysts' expectations for a 0.2% gain. Core Inflation increased by 2.2% on a year-over-year basis, also slowing from June's yearly gains of 2.3%. For the month, volatile energy prices declined by 1.6%. Despite strong signs of firming inflation at the start of the year, the Fed's long-term target for inflation still remains below its targeted objective.
Also on Tuesday, New York Fed president William Dudley jolted markets with hawkish comments on the likelihood that that the U.S. central bank could lift interest rates before the end of the year. Speaking exclusively with Fox Business, Dudley said the Fed is "getting closer" to that point when it "will be appropriate" to actually raise short-term rates. Following last December's historic interest rate hike, the Federal Open Market Committee (FOMC) has held the targeted range of its benchmark interest rate at its current level between 0.25 and 0.50% in each of its first five meetings this year.
The chances of a September rate hike from the CME Group's (NASDAQ:CME) Fed Watch tool doubled to 18% following Dudley's comments from around 9% during the previous session. In addition, the CME Group placed the probability of a December rate hike at 55.1%, up from around 41.9% in Monday's session.
GBP/USD surged by more than 1.25% to 1.3043, bouncing from near 31-year lows from the previous session. It came after the CPI in Britain firmed by 0.6% in July, following a 0.5% monthly gain a month earlier, providing further indications that the U.K. economy could be on solid footing following June's Brexit shock. As the British Pound fell sharply throughout the month, import costs accelerated by the highest amount since 2011. EUR/USD rose by more than 0.8% to an intraday high of 1.1322, clearing 1.13 for the first time since June 24 when voters in the U.K. approved the historic Brexit referendum.
Yields on the U.S. 10-Year gained two basis points to 1.57%, while yields on the UK 10-Year rose by five basis points to 0.58%. Yields on both 10-year government bonds are down sharply over the last year.