SINGAPORE: The dollar skidded to multi-month lows on Thursday after U.S. core inflation hit its slowest in three years, pulling forward expectations for rate cuts in the world's biggest economy and drawing bets that the U.S. currency may have peaked, for now.

In Asia the battered yen extended a rebound into a second session, rallying to its strongest in two weeks at 153.6 to the dollar as the gap between U.S. and Japanese yields narrowed.

The Australian dollar, which had surged 1% on Wednesday, hit a four-month high at $0.6714 but then paused after an unexpected rise in Australian unemployment. It was last at $0.6687.

The euro edged up to a two-month high at $1.0895. The New Zealand dollar also hit a two-month high at $0.6140. Sterling made a one-month high at $1.27.

Core U.S. inflation slowed to an annualised 3.6% in April, Wednesday's data showed, in line with market expectations. That is well above the Federal Reserve's 2% goal, but since it eased from 3.8% a month earlier investors saw it as opening the way for a rate cut as soon as September or perhaps even earlier, as the U.S. presidential election looms in November.

"If we start to see a significant drop (in inflation) then I think last night was maybe the first step," said Bart Wakabayashi, Tokyo branch manager at State Street.

Softer-than-expected U.S. retail sales figures, which were flat last month instead of the 0.4% gain that economists had forecast, reinforced the impression the economy was slowing.

The data drove a rally in Treasuries and, combined with selling in Japanese bonds, the gap between U.S. and Japanese 10-year yields has narrowed 20 basis points this week - on track for the largest weekly move of the year so far.

The Japanese economy however, contracted more than expected in the first quarter, complicating the challenge for policymakers as they look to raise rates from near-zero levels.

Foreign exchange markets may now face a holding pattern until central bankers give a clearer indication of how they intend to respond to the economic data.

"160 (yen) probably was the top for the dollar for the time being, if not for the rest of the year," said Naka Matsuzawa, chief macro strategist at Nomura in Tokyo.

But for it to go down below 150 he said markets would need to see a clearer signal from the Fed of actual rate cuts starting.

The U.S. dollar index made its heaviest one-day percentage drop for the year so far on Wednesday, falling 0.75% and through its 200-day moving average. It was at a five-week low of 104.17 in early Asia trade on Tuesday.

China's yuan rallied slightly to 7.2070 per dollar. Bitcoin regained a footing above its 100-day moving average and touched a three-week high of $66,695.

(Reporting by Tom Westbrook; Editing by Shri Navaratnam and Christopher Cushing)