The dollar extended Thursday’s decline to a two-month low after U.S. inflation in December was weaker than feared, prompting investors to cut crowded long positions in the currency.

The euro benefited greatly from the move and extended its gains to $1.1479, up 0.3% on the day, while sterling and the yen also extended their gains. The monthly U.S. inflation data for December released on Wednesday was slightly above forecasts, with consumer price inflation rising 7% year-on-year as expected – the biggest jump since June 1982.

Still, traders don’t think this inflation data changes the Federal Reserve’s already hawkish stance too much. With the market pricing in at least three rate hikes already, some investors have lowered bets on further dollar gains.

The U.S. index, which measures the U.S. dollar against a basket of competing currencies, fell another 0.2 percent to 94.782. “The magnitude of the dollar sell-off must surely be partly indicative of positioning,” MUFG analyst Derek Halpenny wrote in a research note.

Halpenny said so much Fed tightening has been laid out for next year that expectations for long-term rate hikes have been relatively low, which has kept the dollar in check. “Investors appear to be signaling that the end of QE (quantitative easing), quadruple rate hikes and the start of QT (quantitative tightening) within (9 months) is so aggressive as to limit the scope for further increases. has actually reinforced the belief that peak Fed funds will be below 2%,” he wrote.

Elsewhere, sterling, which rallied as traders believe the British economy can weather a spike in COVID-19 cases and that the Bank of England is set to start hiking as early as next month, rose 0.2 percent to $1.3738. The currency is up more than 4% from December lows and traders have so far ignored the political crisis engulfing Prime Minister Boris Johnson, who apologized for attending a Downing Street garden party during a quarantine over a coronavirus.

New Zealand’s central bank has already started raising rates and the New Zealand dollar rose to $0.6876, adding 0.4 percent for the session and hitting its highest level since late November. The Australian dollar, which tends to perform well when market sentiment generally improves, added 0.3% to $0.7305.

The Canadian dollar has gained more than 3.5 percent in three weeks thanks to higher oil prices as investors overlook the potential economic impact of the Omicron option.

“The dollar shouldn’t rise because the Fed is preparing a tightening cycle,” Commonwealth Bank of Australia strategist Joe Capurso said.

“It’s not a simple equation: a Fed hike equals a dollar rise. The dollar is a counter-cyclical currency that declines as the global economy recovers.”