* Dollar hits range of lows following soft CPI, retail data
* Falling volatility favors risk assets, carry trades
* Markets wager on no negative surprises from China GDP
SYDNEY, July 17 (Reuters) - The dollar carved out a 10-month trough on Monday as the diminished risk of aggressive U.S. policy tightening sent investors piling into leveraged positions in higher yielding currencies or risky assets.
Charts were crowded with milestones with the euro near ground last trod in May 2016 and sterling at its highest since September. The pound's 1.2 percent jump on Friday was the largest in three months and left it at $1.3107.
The was hovering at $1.1471 and just short of major resistance at $1.1489. The U.S. dollar index was at its lowest since September at 95.089, while the greenback bought 112.49 yen having shed a big figure on Friday.
A holiday in Japan kept trade thin ahead of a deluge of economic news from China, which includes gross domestic product, retail sales and industrial output.
Forecasts are for economic growth of 6.8 percent in the second quarter, a healthy result which would not ruffle too many feathers in the region.
That would be a contrast to Friday's U.S. data which showed surprisingly soft reading for consumer prices and retail sales, bringing into question the Federal Reserve's confidence that inflation would soon rebound.
"It is a mixed picture that is likely to leave the Fed cautious, and it is little wonder markets have lowered the odds of further rate hikes this year," said ANZ economist David Plank.
"Whether it also delays the start of balance sheet normalization remains to be seen, but we suspect the Fed will want to push on with that for now."
Fed funds futures imply around a 50-50 chance of another hike by December, and have less than two moves priced in for all of next year. Fed policymakers have penciled in one more rise this year and a further four in 2018.
The prospect of a slow-motion Fed dragged Wall Street's favored gauge of fear, the CBOE Volatility index, to its lowest since December 1993.
Periods of market calm favor carry trades since they lessen the risk of sharp and sudden reversals that would stop investors out of their leveraged positions.
That encouraged flows into higher-yielding currencies, ranging from the Australian dollar to the Mexican peso and South African rand, and into emerging markets stocks.
The Aussie shot to a two-year high and breached major chart resistance in the process in the $0.7700/7778 range. The Aussie was last at $0.7824 with bulls targetting the 200-week moving average around $0.8026. (Reporting by Wayne Cole; Editing by Eric Meijer)