Dollar trades near one-year high after inflation data; Fed minutes on tap

• Headline CPI comes in slightly above expectations
• Traders now see 50% chance of Fed hike by July next year
• Dollar hits fresh nearly 3-year high versus yen

The dollar held near a one-year high on Wednesday after US inflation data showed prices rose solidly in September, stoking expectations the Federal Reserve will announce a tapering of stimulus next month, with the potential for rate hikes by mid-2022.

The consumer price index rose 0.4% last month, versus a 0.3% rise expected by economists polled by Reuters. In the 12 months through September, the CPI increased 5.4%, up from a 5.3% year-on-year advance in August. 

Excluding the volatile food and energy components, the so-called core CPI climbed 0.2% last month, up from 0.1% in August.

"The numbers were a little bit above expectations, but I don't think that really surprises a lot of folks," said Minh Trang, senior FX trader at Silicon Valley Bank. "You don't have to go very far, just to your grocery market or pump gas to know that prices are higher."

"When it comes to the Fed, it gives them more support for a change in monetary policy stance in regards to tapering, in regards to potentially higher rates," he said.

Following the CPI data, the greenback touched a fresh nearly three-year high against the yen at 113.800 yen, before easing. The pair last traded at 113.555.

A surge in energy prices has fueled inflation concerns and prompted bets that the Fed may need to move faster to normalise policy than previously projected, sending two-year Treasury yields to their highest in more than 18 months overnight.

The dollar index , which measures the greenback against six rivals, eased slightly to 94.311 from Tuesday, when it touched 94.563 for the first time since late September 2020 on the back of the higher Treasury yields.

The euro was up 0.25% at $1.1559, slightly above its lowest in nearly 15 months, $1.1522, hit in the previous session.

The Fed will release the minutes from its meeting last month later on Wednesday, potentially providing a catalyst for more strength in the dollar.

"Today's FOMC minutes release could confirm that a November taper announcement may be hard to resist for the Fed but also that there were discussions of the potential impact from further tightening of the US and global financial conditions," said Valentin Marinov, head of G10 FX research at Credit Agricole.

"We further believe that, following the rather mixed US jobs report for September and the delay rather than the resolution of the US debt ceiling issue, the Fed could ultimately opt for a more gradual start to QE taper."

Three Fed policymakers said on Tuesday that the US economy has healed enough to begin to scale back the central bank's asset-purchase program, including Vice Chair Richard Clarida. 

Most Fed policymakers continue to say inflationary pressures will prove transitory.

Governors Lael Brainard and Michelle Bowman are among the Fed officials due to speak later on Wednesday.

Money markets now price about a 50-50 chance of a rate increase by July.

The risk-sensitive Aussie dollar dipped to $0.7349, retreating from Tuesday's one-month high at $0.7384.

Bitcoin traded down 1.53% at $55,140.44, after reaching a five-month high of $57,855.79 at the start of the week.