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By Bloomberg

The dollar fell to its weakest level in a month against the euro as U.S. bond yields slumped relative to their peers in Europe amid reduced wagers that the Federal Reserve will raise interest rates next month.

The U.S. currency dropped from its highest level versus the yen in more than two months. Gains by the dollar are fading as investors speculate that the devaluation of the Chinese yuan will slow inflation globally. Traders pushed down the odds on a September rate increase by the Fed to about 40 percent on Wednesday, from 54 percent as recently as Aug. 7, according to data compiled by Bloomberg.

“Monetary policy in the U.S. is seen as somewhat easier to respond to this disinflation shock, which is the China devaluation and the scope for more,” said Josh O’Byrne, a London-based currency strategist at Citigroup Inc. “Dollar fixed-income has rallied much more than euro fixed-income, so for markets this is a convergence of monetary policy rather than a divergence.”

The dollar slid 0.9 percent to $1.1146 per euro as of 7:33 a.m. New York time, after touching $1.1158, the weakest since July 13. The U.S. currency depreciated 0.7 percent to 124.25 yen, having advanced earlier Wednesday to 125.28, the strongest level since June 8.

Yield Spread

Treasury 10-year notes yielded 148 basis points more than similar-maturity German bunds, the tightest spread since June 4 and below a 2015 high of 190 basis points set on March 11, according to closing-price data compiled by Bloomberg. The gap with Japan’s 10-year bond yields was 175 basis points, the least since May 29.

The U.S. currency slid 0.9 percent on Wednesday, the biggest drop among 10 major currencies tracked in Bloomberg Correlation-Weighted Indexes. It’s still the biggest gainer over the past three months, climbing 5.1 percent, boosted by speculation that the Fed will lead its major counterparts in raising borrowing costs.

China’s central bank cut its daily reference rate for the yuan by 1.6 percent on Wednesday, after reducing it by a record 1.9 percent on Tuesday. That’s clouded the outlook for the first U.S. rates increase since 2006 by highlighting weaknesses in the global recovery and the risk of a prolonged slowdown in commodity prices that undercuts inflation.