US dollar set for modest weekly gain after soft inflation data

By Hannah Lang

NEW YORK (Reuters) -The U.S. dollar was almost flat on Friday after dipping following fresh inflation data that showed U.S. consumer prices increased less than expected in September, keeping the Federal Reserve on track to cut interest rates again next week.

The Consumer Price Index rose 0.3% last month and 3.0% in the 12 months through September. Economists polled by Reuters had forecast the CPI increasing by 0.4% for the month and rising 3.1% year-on-year.

The U.S. dollar index was last down 0.021% at 98.934, after earlier falling as much as 0.2%, still on track for a modest weekly gain.

"The headline was a bit softer than expected," said Marc Chandler, chief market strategist at Bannockburn Capital Markets. "The dollar was sold on the news, even though the market had nearly 100% confidence before the report that the Fed would cut rates, not only next week, but in December."

The CPI report was published despite an economic data blackout because of the government shutdown. The figure, used by the Social Security Administration to calculate its cost-of-living adjustment for millions of retirees and other benefits recipients, was initially due on October 15.

The euro rose and was last up 0.06% at $1.163. Business activity in the euro zone grew at a faster pace than expected in October, led by the bloc's services industry, a survey showed on Friday.

ALL EYES ON TRADE

Trade war worries were back on the agenda after U.S. President Donald Trump said all trade talks with Canada were terminated over an advertisement by the province of Ontario which featured a recording of former President Ronald Reagan speaking negatively about tariffs.

The Canadian dollar was last slightly weaker at 1.40 per U.S. dollar, but market reaction overall was fairly subdued. Investors' focus remained on the looming meeting between Trump and Chinese President Xi Jinping next week.

The proposed Trump-Xi meeting in South Korea has spurred some expectations of a resolution to the on-again-off-again trade war between the world's top two economies.

"I think expectations are quite high for the Trump-Xi meeting, with the upside risk of a significant de-escalation following the face-to-face meeting," said Ben Bennett, head of investment strategy for Asia at L&G Asset Management.

New U.S. sanctions on Russian suppliers Rosneft and Lukoil over Russia's war in Ukraine pushed up oil prices.

That weighed on currencies tied to oil imports, including the yen. The yen's performance is also linked to the policies of Japan's new Prime Minister Sanae Takaichi, widely viewed as a fiscal and monetary dove.

The yen weakened to a two-week low and last fetched 152.85 per U.S. dollar. Data earlier on Friday showed Japan's core consumer prices stayed above the central bank's 2% target, keeping alive expectations of a near-term rate hike.

Takaichi is preparing an economic stimulus package that is likely to exceed last year's $92 billion to help households tackle inflation, government sources familiar with the plan told Reuters on Wednesday.

Sterling was down 0.15% at $1.33, after stronger-than-expected retail sales that were boosted by demand for gold from online jewellers. It was down about 1% this week after soft inflation data had investors adding to expectations for a rate cut from the Bank of England this year.

(Reporting by Hannah Lang in New York; additional reporting by Samuel Indyk in London and Ankur Banerjee in SingaporeEditing by Nick Zieminski, Peter Graff and Diane Craft)