(Bloomberg) -- The dollar fell for a second day amid data showing US producer prices dropped in December by the most since early in the pandemic, providing more arguments for the Federal Reserve to slow down the pace of interest-rate increases.

The Bloomberg Dollar Spot Index weakened as much as 0.7% Wednesday, to its lowest level since late April. The British pound rose 0.9% against the greenback, while the euro climbed 0.6%. Treasury yields fell as traders pared back expectations for rate hikes.

Fed officials have indicated in recent days that another step down in the pace of tightening may be on the table for their upcoming Jan. 31-Feb. 1 policy meeting. At its last meeting in December, the US central bank opted for a half-percentage point increase in its benchmark rate, following four straight hikes of three-quarters of a point.

The dollar has now fallen by more than 10% since peaking in late September, after a rally sparked by aggressive tightening throughout much of 2022. St. Louis Fed President James Bullard said Wednesday rates must still rise further to ensure that inflationary pressures recede.

“The data support a slower pace of tightening, but I don’t think the readings support a pause yet,” said Win Thin, the global head of currency strategy at Brown Brothers Harriman & Co. in New York. “Still, until we get some signs that the market is being overly optimistic on inflation and the Fed, it will be hard for Bullard and the hawks to regain control of the narrative.”

The producer price index for final demand fell 0.5% last month, the most since April 2020, and was up 6.2% from a year earlier, according to a Labor Department report published Wednesday.

Separate data published Wednesday by the Commerce Department showed that US retail sales fell in December by the most in a year, suggesting consumer spending may be losing some of the resilience that so far has kept the economy expanding in the face of steep rate increases.

“The picture could change if we got back to worrying about a deeper US recession,” said Kit Juckes, the chief FX strategist at Societe Generale SA in London. For now, the economic data is “allowing the US rates curve to fade the Fed’s comments about terminal rates, and compare that with the hawkish European Central Bank.”

The Swedish krona, the New Zealand dollar and the Swiss franc were top gainers among the Group-of-10 currencies, while the Japanese yen was underperforming. The Bank of Japan defied intense market speculation earlier on Wednesday and fortified its defense of its stimulus framework, prompting a sharp slide in the yen. It lost as much as 2.6% against the dollar before curbing its decline. 

--With assistance from Robert Fullem.

(Updates with comments from Fed officials and analysts beginning in fourth paragraph.)

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