US consumer prices recorded their biggest increase in eight months in September as gasoline prices soared in the wake of hurricane-related refinery disruptions, but underlying inflation remained muted.
With the unexpected increase, the consumer sentiment index surged up to its highest level reaching 103.8 in January of 2004.
"There is really no fig leaf to cover up this notion that inflation is weak, and it's weak in a very broad sense", said Aaron Kohli, an interest rate strategist at BMO Capital Markets in NY.
"The move in the dollar index this week is primarily a correction to the big move that we had in September", said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
U.S. Treasury yields dipped and the dollar rose slightly on Thursday as investors awaited U.S. inflation data while Wall Street stock indexes fell as earnings season kicked off with a whimper.
In U.S. stocks, banks and media companies were the biggest drags on the S&P 500 as AT&T Inc fueled concerns about video subscribers and investors took fright at comments from JPMorgan and Citigroup on consumer debt.
The 30-year bond was last up 15/32 in price to yield 2.8562 percent, from 2.876 percent late on Wednesday.
On Wall Street worldwide trade talks boosted the materials sector while higher oil prices helped the energy sector and retail data helped consumer stocks, said Tim Ghriskey, chief investment officer of Solaris Asset Management in NY.
The year-over-year growth in core consumer prices also accelerated to 2.2 percent in September from 2.0 percent in the previous month.
The euro was down 0.15 percent to $1.1839 snapping four straight days of gains after rising to its highest since September 25 earlier in the session.
The 30-year bond last rose 9/32 in price to yield 2.8388 percent, from 2.853 percent late on Thursday.
Meanwhile, sterling rose to its highest against the greenback since October 4.
The U.S. dollar index fell 0.14 percent, with the euro up 0.16 percent to $1.1848.
Sterling last traded at $1.3273, up 0.39 percent on the day.
"On the opposite case though, a miss on one or both reports will disappoint the dollar bulls. and further dumping of the US currency should be expected", he said, also referring to Friday's consumer sentiment report due at 10 a.m.
Spot gold was almost unchanged at $1,293.76 an ounce at 0054 GMT after gaining for five straight sessions.