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 Asian shares extended a global rally on Thursday after softer-than-expected U.S. inflation data encouraged bets of less aggressive rate hikes from the Federal Reserve, while the dollar struggled for footing after its biggest plunge in five months.

U.S. consumer prices were unchanged in July compared with June, when they rose a monthly 1.3%. The July result was lower than expectations due to a sharp drop in the cost of petrol, causing markets to reposition on hopes that inflation was peaking.

MSCI's broadest index of Asia-Pacific shares outside Japan surged 1.4% to the highest in six weeks, buoyed by a 1.8% jump in Hong Kong, a 1.2% advance in South Korean shares and a 1.5% gain in China's blue chips.

The risk-on sentiment is set to continue in Europe when markets open, with the pan-region Euro Stoxx 50 futures last up 0.4%. The S&P 500 futures rose 0.2% and Nasdaq futures gained 0.3%.

"Rising real yields, due to the Fed's commitment to fighting inflation, have been an enormous problem for valuations in 2022, so any dovishness is seen as positive by the stock market, particularly for the highest valued companies," said Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors.

"However, the potentially more dovish outlook undermined a key support for the U.S. dollar."

Overnight on Wall Street, the S&P 500 rose more than 2% after the inflation report, while the Nasdaq Composite added 2.9%. The Nasdaq has now gained more than 20% from its June low.

Slowing U.S. inflation may have opened the door for the Federal Reserve to temper the size of coming rate hikes. Traders now price in a 50 basis point (bps) rate hike next month, compared with the 75 bps increase that had been expected before the inflation report.

"For the FOMC, the July inflation report is a pleasing first step towards being able to claim victory over inflation. However, at least one or two more similar readings for inflation are necessary if they are to have confidence that the inflation emergency has passed," said Elliot Clarke, senior economist at Westpac.

Indeed, policymakers left no doubt they would continue to tighten monetary policy until price pressures were fully broken.

During Wednesday's session, Chicago Fed President Charles Evans said inflation was still "unacceptably" high, and that the Fed would need to continue to raise rates.

Minneapolis Federal Reserve Bank President Neel Kashkari said that while the inflation reading was "welcome" the Fed was "far, far away from declaring victory" and needed to raise rates much higher.

San Francisco Fed President Mary Daly, in an interview with the Financial Times, also warned it is far too early for the U.S. central bank to declare victory in its fight against inflation and a half-percentage point rate rise in September was her baseline.

U.S. Treasuries, which had pulled back from an earlier plunge in yields as traders reassessed the Fed's rate path, were not trading in Asia on Thursday due to a holiday in Japan.

In the currency markets, the dollar gained 0.2% against its major peers after plunging 1% in the previous session, the most in five months. Commodity currencies rallied on improved risk appetite from hopes of a soft landing.

Oil prices fell in early Asian trade as traders shifted attention back to more supply of crude entering the market coupled with weaker demand. Brent crude futures fell 0.4% to $97.02 a barrel, while U.S. West Texas Intermediate crude futures fell by a similar margin to $91.52.

Spot gold eased 0.4% to $1,784.74 per ounce, pulling further away from a one-month high hit in the previous session. [GOL/]