* Dollar hits host of lows in wake of soft CPI, retail sales
* Raft of China data top forecasts, GDP +6.9 pct y/y
* Muted volatility favouring risk assets, carry trades
By Wayne Cole
SYDNEY, July 17 (Reuters) - The dollar huddled near a 10-month trough on Monday as upbeat Chinese news and the prospect of only gradual policy tightening in the United States sent investors piling into leveraged positions in higher yielding currencies and risky assets.
China’s second-quarter gross domestic product handily topped forecasts with a rise of 6.9 percent on the year, while retail sale and industrial output were both strong.
“It is encouraging for global growth as well because China is the second largest economy on the planet,” said Craig James, chief economist at fund manager CommSec in Sydney.
“Based on this data, there is no need for easing and no need really for tightening either because inflationary pressures are very much contained,” he added. “So I think the central bank just continues to be watchful.”
Currency charts were already crowded with milestones with the euro near ground last trod in May 2016 and sterling at its highest since September. The pound’s 1.2 percent jump on Friday was the largest in three months and left it at $1.3093.
The was hovering at $1.1458 and not far off major resistance at $1.1489. The U.S. dollar index was at 95.212 having touched its lowest since September.
The dollar did regain a little ground on the yen to 112.64 , having shed a big figure on Friday on news of surprisingly soft readings for U.S. consumer prices and retail sales.
The repeated disappointment on prices cast a question mark over the Federal Reserve’s confidence that inflation would soon rebound.
“It is a mixed picture that is likely to leave the Fed cautious, and it is little wonder markets have lowered the odds of further rate hikes this year,” said ANZ economist David Plank.
“Whether it also delays the start of balance sheet normalisation remains to be seen, but we suspect the Fed will want to push on with that for now.”
Fed funds futures imply around a 50-50 chance of another hike by December, and have less than two moves priced in for all of next year. Fed policymakers have pencilled in one more rise this year and a further four in 2018.
The prospect of a slow-motion Fed dragged Wall Street’s favoured gauge of fear, the CBOE Volatility index, to its lowest since December 1993.
Such periods of market calm favour carry trades since they lessen the risk of sharp and sudden reversals that would stop investors out of their leveraged positions.
That encouraged flows into higher-yielding currencies, ranging from the Australian dollar to the Mexican peso and South African rand, and into emerging markets stocks.
The Aussie shot to a two-year high and breached major chart resistance in the process in the $0.7700/7778 range. The Aussie was last at $0.7814 with bulls targetting the 200-week moving average around $0.8026. (Reporting by Wayne Cole; Editing by Eric Meijer & Shri Navaratnam)