(Adds Dow, S&P 500 set new highs)
* Global stocks hit fresh all-time high, as do Dow, S&P 500
* Benign U.S. inflation helps stocks, slams bonds, dollar
NEW YORK, July 14 (Reuters) - The U.S. dollar weakened and government bond yields fell to multiweek 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 set new records while global stock markets scaled fresh highs, capping their best week in more than two months. Oil prices gained in volatile trading amid signs of strengthening demand.
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.
The dollar index, which tracks the greenback against six major rivals, slid 0.57 percent to 95.187 after earlier falling to 95.181, 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.
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.
The data indicates "a little bit of concern about how the Fed is going to normalize policy," Learner said.
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 rose 8/32 in price to yield 2.3176 percent. The 10-year German bund yield fell some 3 basis points when European trading started on Friday to 0.49 percent before paring losses.
The euro gained 0.61 percent to $1.464. The Japanese yen strengthened 0.63 percent versus the greenback at 112.56 per dollar, while the Mexican peso gained 0.72 percent and the Canadian dollar rose 0.57 percent versus the greenback.
Stock markets, meanwhile, marched higher. MSCI's gauge of equity performance in 47 countries gained 0.58 percent, and its world index rose 0.56 percent. The pan-European FTSEurofirst 300 index of leading shares rebounded to rise 0.10 percent and close at 1520.41.
The Dow Jones Industrial Average rose 72.51 points, or 0.34 percent, to 21,625.6. The S&P 500 gained 9.57 points, or 0.39 percent, to 2,457.4 and the Nasdaq Composite added 30.69 points, or 0.49 percent, to 6,305.13.
Ten of the 11 major S&P sectors rose, with information technology up 0.77 percent to lead the advancers.
Shares of JPMorgan, Citigroup and Wells Fargo , which have run up in the past few weeks, were lower as their earnings reports failed to excite investors.
In oil markets, benchmark Brent and U.S. WTI futures contracts were on track for weekly gains.
Brent crude futures, the international benchmark for oil, were up 35 cents at $48.77 per barrel.
U.S. West Texas Intermediate (WTI) crude futures rose 35 cents to $46.43 per barrel. (Reporting by Herbert Lash, additional reporting by Saqib Iqbal Ahmed in New York; Editing by Chizu Nomiyama)