Why the dollar heading lower after the inflation data?

The dollar fell against a basket of currencies on Thursday to a two-month low, and extending decline below 95, set for worst weekly decline since last December. 

Fed Chair Powell's testimony confirmed rate hike bets but didn't disclose more hawkish messages, so that was basically in line with what markets had already positioned for. Traders have priced in an about 80% chance of a rate hike in March, according to CME’s FedWatch tool.

Powell indicated the Fed was in a rush to speed up plans for tightening monetary policy, putting some downward pressure on the greenback. Even after Federal Reserve Governor Lael Brainard signal that the Fed is getting ready to start raising interest rates in March.

Inflation is also driving the dollar lower, data show U.S. consumer prices surged in December, with the annual increase in inflation the largest in nearly four decades, which is just in line with market expectation. 

The consumer price index climbed 7% in Decamber, the largest 12-month gain since June 1982, according to Labor Department data released Wednesday. The widely followed inflation gauge rose 0.5% from November, exceeding forecasts.

But CPI is expected to cool on 2022. Economists expect CPI growth to moderate to around 3% over the course of 2022, which will depend on supply chains normalizing and energy prices leveling off. If that's really happening, FOMC would be no rush to raise rates aggressively.