(Reuters) - The dollar fell on Friday, extending losses from the previous day, when it posted its largest one-day drop in seven years after U.S. inflation came in lower than expected, making it less likely the Federal Reserve will keep aggressively raising rates.
Data on Thursday showed consumer inflation rose 7.7% year-on-year in October, its slowest rate since January and below forecasts for 8%.
The dollar staged its biggest drop since late 2015 as Treasury yields plunged, while other currencies - the yen and the pound in particular - jumped.
Investor risk appetite got an additional boost from Chinese health authorities easing some of the country's strict COVID-19 restrictions, including shortening quarantine times for close contacts of cases and inbound travellers.
The dollar index was down nearly 0.5%, while risk assets including stocks, emerging-market currencies and commodities rallied. But slowing inflation, while positive for borrowers, reflects a slowing economic backdrop, analysts said.
"It can be a little dangerous in that the 'bad news' is still out there and could come back to burn us, particularly with respect to the Fed," Rabobank currency strategist Jane Foley said.
The dollar has risen by 12% this year against a basket of major currencies, in light of the Fed's determination to bring inflation, which almost hit double digits earlier this year, back towards its target of 2%.
Other central banks have followed suit, with the exception of the Bank of Japan, and, as a result, the yen has witnessed its largest decline against the dollar since 1979.
The dollar, which has gained 22% in value against the yen this year, its steepest gain since 1979's 24% rise, was last down 0.3% against the Japanese currency at 140.60 yen.
The yuan also jumped, as investors cheered the slight relaxing in China's COVID rules, despite cases rising sharply across the country.
The offshore yuan rallied by as much as 1.3% to hit its highest in over a month against the dollar, to 7.0592.
"This is something that's been talked about, but the fact that they've done it is a step in the right direction in terms of fine-tuning the zero-COVID policy," said Moh Siong Sim, currency strategist at Bank of Singapore.
Sterling, meanwhile, pared overnight losses against the dollar and the euro after UK data showed the economy did not contract by as much as expected in the three months to September, although it is still entering what is likely to be a lengthy recession.
The pound rose 0.1% against the dollar to $1.1718, having staged its largest one-day rally the day before since 2017, while against the euro it fell 0.4% to 87.40 pence.
The euro extended the previous day's 2% surge to rise 0.3% to $1.0245, trading around its highest since August.
The futures market shows investors are pricing in a 71.5% chance of a 50-basis-point U.S. rate increase next month, up from around 50/50 a week ago.
"There were flickers of encouragement in the October CPI release, but this pattern would need to be repeated in coming months for confidence to grow that inflation will moderate towards trend over the Fed's forecast horizon," said economists at ANZ.
Cryptocurrencies came under pressure, given ongoing turmoil in the crypto world after exchange FTX's fall. FTX's native token, FTT, last down 9% at $3.366 having fallen nearly 90% this month.
Bitcoin fell 1.2% to $17,344, after plunging below $16,000 for the first time since late 2020 this week.