The dollar stabilised on Thursday as a sudden halt to a robust US stock market rally prompted investors to seek safety, coupled with an unexpected decline in British inflation impacting the pound.

Sterling experienced its most notable drop in two months after British inflation unexpectedly fell below forecasts to an annual rate of 3.9 per cent in October, marking its lowest level in two years. 

Traders hastily priced in potential rate cuts by May, causing the currency to decline by 0.7 per cent to $1.2638.

Analyst Marios Hadjikyriacos of brokerage XM said, “The data suggests that inflation momentum in the United Kingdom is finally losing steam, allowing the Bank of England to join the global rate-cutting cycle next year.”

A late sell-off in US equities during the final hour of trading sent ripples of risk aversion through markets, lifting the previously under-pressure greenback from its lows. 

The Australian and New Zealand dollars retreated from their five-month highs, with the Aussie at $0.6714 and the kiwi at $0.6257.

The euro remained stable at $1.0943, while the yen found support at 143.5 per dollar after losing ground earlier in the week when the Bank of Japan maintained its ultra-easy policy settings.

Market attention now turns to Friday's release of the US core personal consumption expenditure (PCE) index, forecasted by analysts to rise 0.2 per cent in November, with the annual inflation rate slowing to 3.3 per cent, its lowest since 2021.

Analysts anticipate downside risks, suspecting the Federal Reserve may need to ease policy to prevent real rates from rising. 

Despite already pricing in 150 basis points of cuts next year, along with a substantial rally in the bond market and a more than 4 per cent decline in the dollar index from its early November high, some caution is emerging.

OCBC currency strategist Christopher Wong in Singapore noted, "Some adjustments in positions and paring back of risks ahead of (this) event...is only sensible," stressing the potential impact of thin liquidity as the festive season approaches.

The dollar index, down 1 per cent for the year, remained steady at 102.37 in early Asia trade on Thursday, while ten-year US Treasury yields touched a seven-month low of 3.847 per cent in New York.

China's yuan dipped in overnight offshore trade against the rising dollar, maintaining stability at 7.1480 to the dollar on Thursday. Bitcoin briefly surged above $44,000 on Wednesday and held steady at $43,667 on Thursday.

(With Reuters Inputs)