U.S. inflation data for the month of May showed consumer prices unexpectedly falling on a monthly basis, marking the second drop in three months.
The Labor Department said its Consumer Price Index dipped 0.1 percent last month, weighed down by declining prices for gasoline, apparel, airline fares, motor vehicles, communication and medical care services, among others.
The Australian dollar rose 1.3 percent to its highest against its USA counterpart since April 3.
The Commerce Department says retail sales dropped 0.3 per cent last month, the first decline since February and the sharpest since a 1 per cent decrease in January 2016.
Excluding the volatile food and energy categories, the so-called core CPI went up 0.1 percent in May on a seasonally adjusted basis, and was up 1.7 percent over the year, also lower than the 1.9 percent growth in April.
The Federal Reserve was expected to boost a key interest rate on Wednesday with officials viewing the recent slowdown in inflation as temporary. Owners' equivalent rent of primary residence advanced 0.2 per cent after a similar increase in April.
Economists have said they think consumer spending, which accounts for about 70 per cent of US economic activity, will pick up in the spring and summer after a slow start to 2017.More news: Police release photos of London attackers' fake bomb belts
More news: Senators to ask about Trump pushback on Russia investigation
More news: Ex-NBA player Rodman expected to arrive in North Korea today
The Atlanta Fed is forecasting the economy growing at a 3.0 percent annualized rate in the second quarter, but this estimate could be trimmed following the weak core retail sales.
The dollar index was last down 0.6 percent at 96.437, after earlier touching its lowest since November 9 at 96.323.
"With employment near its maximum sustainable level and the labor market continuing to strengthen, the committee still expects inflation to move up and stabilize around 2% over the next couple of years in line with our longer run objective", Fed Chairwoman Janet Yellen said Wednesday. Those figures would rise in increments over a year until they reached $30 billion a month in Treasurys and $20 billion in mortgage bonds. "It won't stop the Fed from hiking interest rates later today, but it increases the downside risks to our forecast that there will be a further two rate hikes in the second half of this year", said Paul Ashworth, chief United States economist at Capital Economics in Toronto. Unemployment in May dipped to 4.3 percent.
The Fed has a 2 percent inflation target and tracks an inflation measure which is now at 1.5 percent.
In the retail sales report, auto sales fell 0.2 per cent after rising 0.5 per cent in April.
Last month, rental costs increased 0.3 percent, matching April's gain.
In May, food costs edged up a tiny 0.2 per cent while energy costs fell 2.7 per cent, led by a 6.2 per cent drop in the price of gasoline. That has led some retailers, including Macy's M.N , Sears SHLD.O and Abercrombie & Fitch ANF.N to announce shop closures. Sales at restaurants and bars slipped 0.1%.