Bond traders have sharply pared expectations for a Federal Reserve rate increase this year, with fed funds futures now pricing a 31 percent probability of a September hike—down from 40 percent Wednesday and 55 percent one week prior.
The Producer Price Index for final demand was unchanged in July, following a revised 0.1 percent decline in June and missing economists' forecasts for a 0.2 percent rebound.
U.S. consumer prices rose only slightly last month, reinforcing the view that inflationary pressures are easing.
Noel Dixon, senior macro strategist at State Street, said the combined inflation data strengthens the case for the Fed to hold rates steady in September. Dixon said components of the producer price report that feed into the personal consumption expenditures index point to a favorable reading.
The dollar index fell 0.07 percent to 99.88. The euro gained 0.1 percent against the dollar, trading at $1.1536. The Japanese yen strengthened 0.14 percent to 159.19 per dollar, partially reversing gains from last month's joint U.S.-Japan currency intervention.
The yen's recent moves have fueled bets that the Bank of Japan may need to accelerate its own rate increases ahead of the central bank's next policy meeting.
The British pound gained 0.08 percent to $1.3503, following data showing unexpected economic growth in the United Kingdom in June, driven by lower energy prices and stronger consumer activity.
The Norwegian krone weakened after Norges Bank held its benchmark rate unchanged at 4.25 percent. The central bank acknowledged a recent softening of inflation, though Norway still carries one of the highest policy rates among the 10 most developed economies.
Inflation remains above the Federal Reserve's 2 percent target. Oil prices had climbed in recent weeks on disruptions linked to Iran in the Strait of Hormuz, a countervailing inflationary pressure. On Thursday, however, crude prices retreated as investors weighed prospects for weaker global demand and higher U.S. crude inventories.
In the labor market, Thursday's data showed a moderate rise in Americans filing initial unemployment claims last week, suggesting continued stability even after unexpected job losses in July.
Traders now await the personal consumption expenditures report due later this month for further guidance on the inflation trajectory and the Fed's next policy move.
