(Adds comment in paragraphs 4-5,7, updates prices at 3 p.m. ET (1900 GMT))
The dollar slumped against major currencies on Wednesday after U.S. consumer prices in April showed inflation had resumed trending lower in the second quarter, raising hopes the Federal Reserve can deliver an interest rate cut as early as September.
Also boosting optimism that the Fed was closer to a rate cut was a reading of U.S. retail sales that was unexpectedly flat last month, as higher gasoline prices pulled spending away from other goods in a sign the consumer was retrenching a bit.
After inflation proved "sticky" in the first quarter, with housing rental rates and other prices remaining stubbornly high, the market welcomed the CPI data. But slowing retail sales provided the real news for the market.
"You go to see the lead actor in the movie, but the supporting actor steals the show and it's retail sales, which is really driving the price action today across the board," said Roosevelt Bowman, senior investment strategist at Bernstein Private Wealth Management in New York.
The Australian dollar and other currencies known as high-beta because of their volatility performed well, he said.
"Some of the higher-beta currencies that have been under pressure this year, that have been favorite sell positions against the dollar, they're doing quite well today," he said.
However, Bowman said the day's data wouldn't change the Fed's outlook on near-term inflation but led the market to buy duration in the form of Treasuries and to sell the dollar.
The Australian dollar AUD= gained 0.97% to 0.6687, while the Mexican peso MXN= rose 0.81% to 16.6971 per dollar.
Futures traders priced in a higher probability of rate cuts, with 24 basis points seen for when the Fed meets in September, and almost 51 bps of cuts by December, according to LSEG data.
The dollar index =USD , which measures the greenback against a basket of major currencies including the yen and the euro, fell to a fresh one-month low at 104.30, and was last 0.66% lower at 104.35.
One of the dollar's biggest declines was against the yen JPY=EBS as it weakened 0.96% to 154.94. The drop would likely keep at bay currency intervention by the Bank of Japan and Japanese other authorities, said Marvin Loh, senior global macro strategist at State Street in Boston.
"The BOJ is going to like the dollar-yen at 155 again," he said. "The fast money was definitely willing to push the dollar again higher after the intervention."
The dollar's surge to a 34-year peak of 160.245 yen on April 29 triggered two rounds of aggressive yen buying that traders and analysts suspect was the work of the BOJ and Japan's Finance Ministry.
The consumer price index rose 0.3% last month after advancing 0.4% in March and February, the Labor Department's Bureau of Labor Statistics said. In the 12 months through April, the CPI increased 3.4% after climbing 3.5% in March.
Economists polled by Reuters had forecast the CPI gaining 0.4% on the month and advancing 3.4% year-on-year.
The unchanged reading in retail sales last month followed a slightly downwardly revised 0.6% increase in March, the Commerce Department's Census Bureau said on Wednesday. Retail sales were previously reported to have risen 0.7% in March.
Fed Chair Jerome Powell gave a bullish assessment on Tuesday of where the U.S. economy stands, with an outlook for continued above-trend growth and confidence in falling inflation that, while eroded by recent data, remains largely intact.
In other major currencies, the euro EUR=EBS rose 0.52% to $1.0877 and sterling GBP= rose 0.69% to 1.2675.
The dollar dropped 1.3% to 10.6729 versus the Norwegian krone NOK= after hitting 10.6671,its lowest level since April 10, with analysts saying the gap between U.S. and Norwegian rates might have peaked.
Bitcoin BTC= rose 6.12% to $65,397.00.
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