* China Q3 GDP in line with market expectations
* Aussie pares some gains after setting 2-week high
* China Sept industrial production disappoints
* Dollar falters after U.S. core CPI below expectations (Updates prices, adds comments)
By Masayuki Kitano and Hideyuki Sano
SINGAPORE/TOKYO, Oct 19 (Reuters) - The dollar stepped back from a seven-month high against an index of currencies on Wednesday after U.S. consumer prices showed a moderation in underlying inflation, prompting markets to trim bets on a December Federal Reserve rate hike.
The U.S. dollar’s index against a basket of six major currencies stood at 97.846, off Monday’s seven-month high of 98.169.
The Australian dollar pared some of its earlier gains after a barrage of Chinese economic data. The overall reaction across major currencies was limited, however, as there were no huge surprises.
China’s third-quarter gross domestic product matched market forecasts, while September industrial production came in below expectations.
“There was probably some profit-taking in the wake of the (Australian dollar‘s) rise seen since yesterday,” said Hirofumi Suzuki, an economist for Sumitomo Mitsui Banking Corporation in Singapore, adding that there may have been some reaction to the slightly disappointing data on industrial output as well.
Still, Suzuki said the Chinese data overall suggests that Chinese authorities still have solid control over the economy and that the risks of a sharp deterioration are limited. That bodes well for the Aussie dollar in the near term, he said.
The Australian dollar last traded at $0.7670. Earlier on Wednesday, the Aussie dollar rose to $0.7691 at one point, matching its high on Oct. 4.
The Aussie had gained support following comments from Reserve Bank of Australia Governor Philip Lowe on Tuesday that he was comfortable with the current exchange rate.
The dollar struggled to gain traction in the wake of U.S. inflation data on Wednesday.
The so-called core CPI, which strips out food and energy costs, gained 0.1 percent last month after climbing 0.3 percent in August, slowing the year-on-year increase in the core CPI to 2.2 percent following a 2.3 percent rise in August.
Fed fund futures <0#FF:> imply around a 65 percent probability of the Federal Reserve raising interest rates by December, down from 70 percent ahead of the U.S. CPI data.
“There was a bit of correction on the dollar’s broad strength. The dollar’s decline was notably against sterling most, as the British currency was heavily shorted,” said Yukio Ishizuki, currency strategist at Daiwa Securities.
The euro held steady at $1.0984, just above Monday’s 2-1/2-month low of $1.0964.
A break of that level could open the way for a test of $1.0912, a low marked on June 24 in the wake of the Brexit vote.
The common currency is weighed by wariness ahead of the European Central Bank’s policy meeting on Thursday.
The central bank is widely expected to keep its policy unchanged with any decisions on the future of its asset purchase scheme expected to be deferred until December.
But some traders are nervous ECB chief Mario Draghi could take a dovish stance to counter recent talk that the ECB is considering tapering its asset purchases.
The British pound slipped 0.1 percent to $1.2287. Still, sterling held on to the bulk of the gains made on Tuesday, when it climbed 0.95 percent for its biggest daily gain in six weeks.
Short-covering in sterling was triggered after a UK government lawyer said parliament would “very likely” have to ratify any deal to take Britain out of the European Union, and following stronger-than-expected inflation numbers.
Investors generally assume British lawmakers as a whole are less in favour of a hard line on Brexit than Prime Minister Theresa May and the ministers she has put in charge of negotiations.
Against the yen, the dollar eased 0.1 percent to 103.80 yen. (Reporting by Hideyuki Sano; Additional reporting by Masayuki Kitano; Editing by Eric Meijer and Jacqueline Wong)