By Rae Wee

SINGAPORE (Reuters) - The dollar languished on Friday after a sharp sell-off overnight when U.S. inflation data came in cooler than expected, raising market hopes of a peak in consumer prices that could temper the Federal Reserve's aggressive monetary tightening campaign.

The yuan also jumped in afternoon Asian trade after Chinese health authorities eased some of the country's heavy COVID-19 curbs, including shortening quarantine times for close contacts of cases and inbound travellers.

The rallied more than 1% following the news, while the touched a high of 7.0592 per dollar, its strongest in over a month.

"This is something that's been talked about, but the fact that they've done it is a step in the right direction in terms of fine tuning the zero-COVID policy," said Moh Siong Sim, currency strategist at Bank of Singapore.

The , which is often used as a liquid proxy for the yuan, jumped 0.63% to touch a new seven-week high of $0.6661.

The similarly notched a fresh two-month peak of $0.6040.

The China COVID news gave an additional leg up to risk sentiment, with the dollar largely erasing its modest attempt to recoup some of its deep overnight losses earlier in the session.

The euro extended its 2% overnight surge and pushed further above parity to $1.0234, its highest since August.

"Maybe this is the perfect storm of good news," said Sim.

INFLATION OPTIMISM

Inflation data released in the U.S. showed that the consumer price index rose 7.7% year-on-year in October, the smallest gain since January and below forecasts of an 8% increase.

The dollar tumbled overnight after the release, and recorded its worst day against the Japanese yen since 2016, having fallen 3.7%. It has since clawed back some of those losses and last rose 0.46% to 141.60 yen.

Sterling saw its best daily gain since 2017, jumping over 3% overnight. It last bought $1.1713.

Against a basket of currencies, the slumped more than 2% overnight, the most in over a decade. It was down 0.22% at 107.86 on Friday.

"The overnight moves in the dollar were pretty sharp ... I do think the results in the U.S. CPI for October will support the case for a downshift in the FOMC rate hike in December," said Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:).

U.S. Treasury yields moved decisively lower overnight as investors revised down their expectations of where U.S. rates could peak, with the benchmark 10-year paper slipping below 4% to its lowest in over a month. [US/]

Fed funds futures show that markets are pricing in a 71.5% chance of a 50-basis-point rate increase and a 28.5% chance of a 75 bp increase at the Fed's December meeting, as compared to a nearly-evens chance a week ago.

"There were flickers of encouragement in the October CPI release, but this pattern would need to be repeated in coming months for confidence to grow that inflation will moderate towards trend over the Fed's forecast horizon," said economists at ANZ.

Also at the top of investors' minds on Friday was the ongoing turmoil in the crypto world after crypto exchange FTX's fall from grace.

FTX is scrambling to raise about $9.4 billion from investors and rivals, a source told Reuters.

Cryptocurrencies came under pressure, with FTX's native token, FTT, last 12% lower at $3.272, having fallen nearly 90% month-to-date.

slid over 2% to $17,161, after plunging below $16,000 for the first time since late 2020 earlier in the week.