A key indicator of the US dollar's performance plummeted to a three-month low on Tuesday after wholesale inflation data strengthened speculation that the Fed may bring down the size of interest rates hikes as prices cool. 

According to the Bureau of Labor Statistics, the Producer Price Index soared by 8% in October from a year ago, slower than the 8.3% rate estimated by economists surveyed by Bloomberg. The PPI was down from the 8.4% surge clocked in September. Comerica said the latest PPI report was another strong evidence that businesses were losing pricing power in a cooling economy.

"Softer US inflation expectations are adding further fuel to the fire of dollar weakness, which was widely welcomed across global currencies last week and has now found encouragement to continue into this trading week," Jameel Ahmad, chief investment strategist MENA at Alpari, told Insider in emailed comments. 

The US Dollar Index slumped by as much as 1.2% to 105.34, the lowest print since August 11. The index, which tracks moves against the euro, the Japanese yen, the British pound, and three other currencies, later cut the loss to 0.3%. 

Meanwhile, the British pound added 0.5% against the dollar and the yen gained 0.3%. The euro, however, reversed course and was down 0.1% versus the greenback.

"PPI is often considered a lead indicator of [the Consumer Price Index], so the data suggests that a further cooling in CPI is on the way. The evidence is looking more and more convincing that inflation is falling. This builds on expectations that the Fed will slow the pace of rate hikes," Fiona Cincotta, senior financial markets analyst at City Index, wrote in a note. 

"While Fed speakers, such as Lael Brainard, have suggested that the time could be approaching for less aggressive rate hikes, they have also been keen to point out that there is still work to do to bring inflation lower," said Cincotta. 

"However, the market sees the light at the end of the rate-hiking tunnel, even if that is in 2023, which is helping boost sentiment and lift demand for stocks. Meanwhile, the USD is tumbling lower as a less hawkish Fed is starting to look likely." 

The central bank has increased its benchmark interest rate from 0% to a range of 3.75% to 4% this year, including hikes of 75 basis points at the past four meetings. 

"It is too early to start suggesting that these [inflation] data headlines will lead to a reversal in stance from the Federal Reserve, in which many investors are looking for a pivot away from raising interest rates at the fastest pace in a generation," said Ahmad. "I would instead look at these readings as a reason for the overall pace of US interest rate hikes to slow because inflation expectations are still at a sustained high level."