The dollar fell against most currencies in volatile trading on Thursday, after spiking early following a hotter-than-expected US inflation report, as some investors thought the market's initial response to the data was excessive.
The greenback briefly hit a 32-year peak against the yen of 147.665 after the data, then pared gains to trade up 0.2% at 147.25 yen.
The euro also fell against the dollar initially to a two-week low, then rebounded to trade 0.7% higher at $0.9773.
Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York, said the current FX moves "are signs of a distressed market, freaking out over a mild miss on a data point."
"The reversal in the dollar is a shock. It's a super jittery market that a tiny flow can have an exaggerated impact."
Data showed US consumer prices increased more than expected in September and underlying inflation pressures continued to escalate, cementing expectations the Federal Reserve will deliver another 75-basis-point (bps) rate increase at next month's policy meeting.
The consumer price index rose 0.4% last month after gaining 0.1% in August. Economists polled by Reuters had forecast the CPI climbing 0.2%. In the 12 months through September, the CPI increased 8.2% after rising 8.3% in August.
Following the data, fed funds futures have also priced in a 13.4% chance of a 100-bps rate hike.
"Inflation has persisted despite improvement in factors that were supposedly keeping it elevated -- think energy prices and prices for used vehicles, which declined 1.1% in September," said Brian Westbury, chief economist, at FT Advisors.
"That's because overall inflation has been – and always is – a monetary phenomenon. The problem is that the Fed thinks it can manage inflation just by targeting short-term rates. We think the Fed needs to focus less on hiking interest rates and more on keeping the growth in the money supply under consistent control."
MARKET ON YEN-INTERVENTION WATCH
Traders overall remained on the lookout for Japanese intervention to prop up a struggling yen. Officials have reiterated they stand ready to take appropriate steps to counter excessive currency moves, though whether they wish to defend particular levels remains unclear.
"I do think that the Ministry of Finance will order another round of intervention over the next few weeks," said BMO's Anderson. "I think they will come in somewhere in the 148 yen-handle. That though may buy the MoF just a few weeks."
The greenback also soared against the Swiss franc earlier, hitting its highest since May 2019. The buck was last up 0.2% at 0.9995 francs.
The Australian dollar briefly dropped to a 2-1/2-year low against the US unit at US$0.6170, before recovering to trade 0.3% higher at US$0.6291.
Sterling, meanwhile, posted steep gains against the dollar after reports of a possible U-turn by the UK government on its fiscal plans.
The pound last changed hands at $1.1306, up 1.9%. Against the euro, sterling rose to a five-week high. The euro last traded at 86.41 pence, down 1.1%.
Sky News reported on Thursday that the British government is discussing making changes to the fiscal plan announced last month and looking at which parts of the tax-cutting package might be ditched in a further U-turn by Prime Minister Liz Truss.
British finance minister Kwasi Kwarteng said "let's see", when asked in an interview if financial markets had improved on Thursday because of expectations of a U-turn on his plans to scrap an increase in corporation tax, the Telegraph reported.