By Laura Matthews
NEW YORK, Oct 13 (Reuters) - The dollar slipped from an 18-month high on Tuesday as oil prices retreated and investors reassessed the AI-fueled rally that has supported demand for US assets this year, while awaiting fresh clues on the Federal Reserve's interest rate path.
"The dollar is retreating as skepticism grows over the strength and sustainability of artificial intelligence-related equity valuations, threatening to curb capital inflows into American financial markets," said
Karl Schamotta, chief market strategist at Corpay in Toronto.
The dollar further extended losses after New York Fed President John Williams said he still expects one more rate hike this year, but sees no need for further increases in 2027.
That left the US dollar index, a measure of the greenback's strength against a basket of six currencies, down 0.37% to 102.18 after reaching 102.61 on Monday, its highest level since April 2025.
Markets expect US President Donald Trump to avoid escalation in the Middle East, as a wider conflict could hurt his standing ahead of the midterm elections next month.
Trump said last week the US will not attack Iran before the elections, and he mentioned an energy ceasefire between Russia and Ukraine on Sunday.
Oil prices fell 0.75% to $105.87 per barrel on Tuesday, as traders weighed the prospect of additional Russian diesel supplies. Russia said it can restore diesel exports beyond levels Trump outlined in a deal with Moscow.
Beyond energy, analysts said the dollar's recent rally is also being challenged by growing doubts about the artificial intelligence-driven investment story.
Investors are now awaiting the release on Wednesday of the US Consumer Price Index for September, which should provide further clues about possible Fed policy tightening.
Investors abandoned bets on a Fed rate hike later this month after two policymakers argued for gathering more evidence before deciding whether further tightening is needed, while Fed Governor Christopher Waller said inflation expectations remained "well anchored."
Traders see about an 80% chance that the Fed will leave rates unchanged at its October 27-28 meeting, up from 51% a month ago, while pricing in about 75 basis points of tightening by late 2027, CME Group's FedWatch Tool showed.
"We think it’s going to be softish. There’s a bit of headline risk because of the oil prices," said Steven Englander, head of global G10 FX research and North America macro strategy at Standard Chartered Bank in New York. "But some of the factors pushing up core are fading. Tariffs are last year's news."
Rising oil prices recently have been supporting the dollar at the expense of currencies such as the euro and yen, which are linked to economies far more dependent than the US on imported oil.
EURO REBOUNDS DESPITE GAS PRICES HITTING HIGHS
The euro rebounded from a roughly 17-month low on Tuesday despite another jump in gas prices, a key driver of euro zone inflation, while concerns over France's fiscal outlook persisted. It was up 0.40% at $1.1198 after hitting $1.11525 on Monday, its lowest level since May 2025.
"There has been a slight narrowing in bond spreads within Europe," said Englander. "We are not at Defcon 1 when it comes to perceptions of French fiscal vulnerability. We have backed off that."
Natural gas prices in Europe rose to their highest level since December 2022 and were last at €86.74 per megawatt-hour.
The yen strengthened 0.18% to 158.33 against the dollar after Bank of Japan data showed wholesale prices rose 6.8% in the year to September, missing a median market forecast of 7.6% but still enough to justify market fears of higher interest rates.
Investors continued to see support from the prospect of further BoJ policy tightening, and the risk of official intervention against excessive currency moves.
The euro was last up 0.19% at 177.295 versus the Japanese currency, after hitting 176.25, its lowest level since November 2025.
The Australian dollar was at $0.69830, following the release of the minutes from the Reserve Bank of Australia's September board meeting. The board voted unanimously to raise rates for the fourth time this year.
(Reporting by Laura Matthews in New York; Additional reporting by Stefano Rebaudo; Editing by Jan Harvey, Colin Barr, Paul Simao and Cynthia Osterman)
