* Sept core CPI data boost dollar index from 7-week low
* Euro retreats as ECB’s Nowotny says need to act is “obvious”
* Grim regional business data cap greenback’s rebound
* Dollar falls to lowest level against yen since February (Updates market action, changes dateline, previous LONDON)
By Richard Leong
NEW YORK, Oct 15 (Reuters) - The dollar rose against a basket of currencies on Thursday as underlying domestic inflation strengthened more than expected in September, reviving some expectations the Federal Reserve would raise interest rates this year.
The rebound of the dollar index from a seven-week low set earlier on Thursday was limited by gloomy figures on regional manufacturing from the New York and Philadelphia Feds.
The surprise 0.2 percent rise in U.S. consumer prices excluding food and energy last month boosted the year-over-year gain to 1.9 percent, keeping alive chances the core inflation would attain the Fed’s 2 percent goal in the coming months.
“The inflation picture looks less grim. That gave some stability to the dollar,” said Sebastien Galy, currency strategist at Deutsche Bank in New York.
The dollar index was last up 0.5 percent at 94.361, recovering from a seven-week low at 93.806.
The latest U.S. consumer price data compounded selling in the euro that was already falling on comments by European Central Bank policymaker Ewald Nowotny, who said it was “obvious” the bank must search for more ways to stimulate the euro zone economy.
Nowotny’s comments underscored the downside risk to the euro, namely that a slowdown in global growth will result in the ECB providing more stimulus in coming months.
While the euro’s drop gave the dollar some respite, there was a broad feeling that the strong dollar environment that has dominated the past 18 months is fading.
“Generally the theme is still dollar weakness across the board, because the market is pricing out a rate hike this year,” said Thu Lan Nguyen, currency analyst with Commerzbank in Frankfurt. “I don’t see anything that will change that in the next couple of weeks.”
U.S. interest rates futures implied traders see about a 1-in-4 chance the Fed will raise interest rates by year-end, little changed from on Wednesday, according to CME Group’s FedWatch program.
The euro was down 0.7 percent on the day at $1.1393, retreating from an earlier peak of $1.1495, its strongest since Aug. 26.
The greenback continued to weaken against the yen on bets the Fed would not raise rates in 2015 due to the weakening global outlook and market volatility. It hit an eight-month low earlier at 118.07 yen before retracing to 118.55 yen, down 0.2 percent from late on Wednesday.
Additional reporting by Patrick Graham in London; Editing by Andrew Roche and Meredith Mazzilli