NEW YORK (Reuters) - The dollar weakened and government bond yields fell to multi-week lows on Friday after a benign reading of U.S. inflation in June and soft retail demand raised doubts the Federal Reserve would increase interest rates later this year.

The Dow and S&P 500 both closed at new records while gauges of global stock markets also scaled fresh highs, capping their best week in more than two months. Oil prices rose 1 percent.

The U.S. consumer price index increased 1.6 percent, the smallest gain since October 2016, after rising 1.9 percent in May, the Labor Department said. Year-on-year CPI has been softening steadily since February, when it hit 2.7 percent.

The CPI’s drop of 0.1 percent in May and the lack of a rebound last month could trouble Fed officials who have largely viewed a recent moderation in price pressures as temporary.

“The CPI data begs the question, at what point does transitory becomes something that is more sustained, in terms of the softness,” said Richard Franulovich, senior currency strategist at Westpac Banking Corp in New York.

U.S. interest rates futures rose as traders pared their view the Fed would increase rates again in 2017. The dollar index .DXY, which tracks the greenback against six major rivals, slid 0.64 percent to 95.113 after earlier falling to 95.100, its lowest since September 2016. The drop came after the U.S. data raised doubts about U.S. economic growth and whether the Fed will hike rates again this year.

“This cements the weaker trend in the dollar and lower U.S. yields and I think this story has got legs,” Franulovich said.

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The annualized rate of inflation in several CPI components over the past three months showed declines of 4.9 percent in apparel, 5.5 percent in used cars and trucks and 4.1 percent in professional services, said Heidi Learner, chief economist in New York for brokerage Savills Studley, a unit of Savills Plc SVS.L.

The data indicates “a little bit of concern about how the Fed is going to normalize policy,” Learner said.

YIELDS DROP

U.S. Treasury yields dropped to multi-week lows as the benign inflation data and unexpected fall in retail sales fueled doubts about an interest rate increase later this year.

The benchmark 10-year U.S. Treasury note US10YT=RR rose 6/32 in price to yield 2.3248 percent. The German 10-year yield fell as much as 4 basis points to 0.49 percent, before paring declines to about 0.53 percent at the end of day.

The euro EUR= gained 0.64 percent to $1.468. The Japanese yen strengthened 0.65 percent versus the greenback at 112.53 per dollar, while the Mexican peso gained 0.48 percent and the Canadian dollar rose 0.58 percent versus the greenback.

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Stock markets, meanwhile, marched higher. MSCI's gauge of equity performance in 47 countries .MIWD00000PUS gained 0.65 percent, and its world index .WORLD rose 0.64 percent. The pan-European FTSEurofirst 300 index .FTEU3 of leading shares rebounded to rise 0.10 percent and close at 1520.41.

The Dow Jones Industrial Average .DJI rose 84.65 points, or 0.39 percent, to 21,637.74. The S&P 500 .SPX gained 11.44 points, or 0.47 percent, to 2,459.27 and the Nasdaq Composite .IXIC added 38.03 points, or 0.61 percent, to 6,312.47.

Ten of the 11 major S&P sectors rose, with information technology .SPLRCT up 0.89 percent to lead the advancers.

For the week, the S&P rose 1.4 percent, the Dow 1.05 percent and the Nasdaq 2.6 percent, it’s biggest weekly gain in 2017.

Shares of JPMorgan JPM.N, Citigroup C.N and Wells Fargo WFC.N, which have run up in recent weeks, were among the top five biggest drags on the S&P 500 as their earnings reports failed to excite investors.

A supply interruption in Nigeria boosted crude oil and prices posted a weekly gain of more than 4 percent on lower U.S. stockpiles.

Brent crude futures LCOc1, the international benchmark for oil, settled up 49 cents at $48.91 per barrel.

U.S. West Texas Intermediate (WTI) crude futures CLc1 rose 46 cents to settle at $46.54 per barrel.