The dollar steadied above almost two-month lows against its major peers on Wednesday, ahead of data expected to show a fresh surge in U.S inflation that could seal the case for an early rise in interest rates.
Federal Reserve Chair Jerome Powell on Tuesday gave no clear indication that the Fed was in a rush to speed up plans for tightening monetary policy, putting some downward pressure on the greenback which has been benefiting from U.S. rate-hike expectations in recent weeks.
And the currency started to nudge higher as the London trading session got underway and the release of the December U.S. consumer price index (CPI) loomed.
The dollar index was last trading at 95.611 , steady on the day. It had dipped to 95.533 in the Asian session, the lowest since Nov. 18.
Headline U.S. CPI, released at 1330 GMT, is seen coming in at a red-hot 7% on a year-on-year basis, which would be the highest annual CPI number since 1982.
ING currency strategist Francesco Pesole said since an inflation print above 7% is expected by markets, the immediate reaction in currency markets should be contained.
"At the same time, it should allow consolidation for a floor below the dollar in the near term – further cementing expectations for three Fed hikes and leaving the door open to speculate for four in 2022," Pesole said.
"We think this is a reason for markets to keep buying the dips in the dollar for the time being."
In a testimony at his renomination hearing on Tuesday, Fed chief Powell said the U.S. economy was ready for higher interest rates and a run-off of its asset holdings - dubbed quantitative tightening (QT) - to combat inflation.
But he said policymakers were still debating approaches to reducing the Fed's balance sheet, and that it could sometimes take two, three or four meetings for them to make such decisions.
Money markets currently price about 85% odds of a rates lift-off by March, and a total of at least three quarter-point hikes by year-end.
"If inflation comes in line with expectations at 7.0% or proves softer than expected, yesterday’s dollar sell-off will gather momentum," said Lee Hardman, a currency strategist at MUFG in London.
The dollar was just 0.1% firmer at 115.44 yen , while the euro was steady at around $1.1355 . A rise above $1.1387 would take the single currency to its highest since mid-November.
The Australian dollar , often considered a liquid proxy for risk appetite, pulled back from almost one-week highs at $0.72230 as the dollar regained its footing.
The dollar also pulled back from fresh two-months lows against the Canadian dollar at 1.25460 .
Elsewhere, sterling rose to $1.3645 for the first time since Nov. 4, bolstered by a view that the worst of the Omicron COVID surge maybe be passing in Britain - helping pave the way for another near-term rise in UK interest rates.