FOREX-Dollar shakes off weakness after investors rethink Fed outlook

(Updates with comment, refreshes prices at 0940 GMT)

By Amanda Cooper

LONDON, Nov 15 (Reuters) - The dollar edged up on Wednesday after its biggest drop in a year the day before when cooler U.S. inflation data added to investor conviction that the Federal Reserve may not raise rates again, while the pound fell after slower UK inflation figures.

Tuesday's steep drop in the dollar was sparked by data showing U.S. consumer prices were unchanged in October, with the annual rise in underlying inflation the smallest in two years. In the 12 months through October, the CPI climbed 3.2% - below economists' estimates - after rising 3.7% in September.

Investors have all but wiped out the chance of another rate hike at the Fed's December policy meeting, while bets of a rate cut in May next year increased to around 50%, according to the CME Group’s FedWatch Tool.

In Britain, inflation eased to its slowest pace in two years in October, which prompted a reassessment of the outlook for Bank of England policy and dented sterling.

"For me what this does concern, is we’re done, when it comes to rate hikes and it’s a question of when do rate cuts come and that's what markets are staring to price, particularly if you look at the bond market," CMC Markets chief market strategist Michael Hewson said.

The dollar index, which measures the performance of the U.S. currency against six others, was up 0.16% at 104.26, not far from Tuesday's two-month low of 103.98.

The pound eased back from Tuesday's two-month highs after data showed British inflation ran at its slowest pace in two years in October, at 4.6%. This was below forecasts for a reading of 4.8% and below September's 6.7% reading.

Sterling was last down 0.3% at $1.2464. On Tuesday, the pound rose by 1.8% against the dollar, marking its biggest one-day gain in a year.

The euro eased 0.3% to $1.0848 after touching its highest since August the previous day.

The dollar/yen pair rose 0.1% to 150.52, after data showed Japan's economy contracted in July-September, complicating the central bank's efforts to ease out of its ultra-easy monetary policy. On Monday, the yen hit a one-year low close to 152.

Still, Moh Siong Sim, currency strategist at the Bank of Singapore, sees softer U.S. yields and the risk of intervention by the Japanese government limiting the likelihood of the yen weakening much further than it already has.

Between those factors and a Fed which is likely to retain a somewhat hawkish tone, dollar/yen is a "range-bound story for the time being," he said.

The dollar was knocked back from the 152 level on Monday, after a routine options expiry unleashed some profit-taking that took the yen to around 151.20.

LSEG data shows Wednesday's New York expiry has around $3.9 billion in open interest between 150.50 and 152, with $2.6 billion at 152 alone, which might create more volatility.

The offshore Chinese yuan, meanwhile, received some support The offshore yuan, meanwhile, briefly ticked up to a three-month high of $7.2385 against the dollar after domestic industrial output and retail sales growth beat expectations.

Evidence of ongoing weakness in China's property sector, where data showed sales fell faster in October and investment in real estate slumped, took some of the shine off the rally.

The offshore yuan was last at 7.2577 per dollar, down 0.1% on the day.

(Additional reporting by Brigid Riley Editing by Shri Navaratnam, Lincoln Feast and Angus MacSwan)