By Laura Matthews

(Reuters) – The dollar weakened against the euro on Tuesday but remained near its highest level in more than two years as cooler-than-expected inflation data after last week’s strong jobs report weighed on to plan the Federal Reserve’s next move on interest rates. .

The data showed US producer prices rose in December. Investors are starting to scale back bets on rate cuts as potential US tariffs remain in the spotlight.

The greenback pared gains later in the session as traders cautiously awaited Wednesday’s consumer price index report. Investors are closely watching economic data to see if it supports the Fed’s cautious stance on rates.

“It’s possible that traders are hedging the other side of the market today ahead of CPI tomorrow, so we’re seeing some pre-release volatility keeping the dollar a touch depressed,” said Helen Given, associate director of trading at Monex USA in Washington. “Tariff stories are the main driver, it appears, for today’s price action.”

Traders are pricing in the first rate cut in September, but below the 50 basis points the Fed plans for December.

With President-elect Donald Trump starting his second term next week, the focus on his policies is expected by analysts to boost growth and pressure prices.

The threat of tariffs with fewer Fed rate cuts priced in raised Treasury yields and supported the greenback.

However, on Tuesday the market focused again on the chance that US tariffs could be gradually raised, after a Bloomberg report suggested that the US could take a more measured approach.

Trump’s Treasury pick Scott Bessent is expected to maintain a range of US deficits and use tariffs as a negotiating tool, mitigating the expected inflationary impact of US economic policy.

Brad Bechtel, global head of FX, at Jefferies, said while the CPI report is important, “all eyes (are) on Trump and the new administration.”

However, Matt Weller, head of market research at StoneX, said Wednesday’s CPI reading “will ultimately be more important for the central bank and therefore traders, who will be looking for a corresponding cool that reading as a green light to buy risk assets.”

which measures the greenback against six other currencies, fell 0.14% to 109.25, shy of the 26-month high of 110.17 reached on Monday. It hit 114.78 in October 2022, the highest since 2002.

The euro rose 0.51% to $1.0297. It touched $1.0177 on Monday, its lowest level since November 2022.

The single currency fell more than 6% in 2024 as investors worried about tariff threats and the divergence in monetary policy between the Fed and the European Central Bank.

The British pound, down 0.04% at $1.2198 against the dollar, also touched a 2-1/2 month low against the euro as concerns about Britain’s fiscal challenges continued to weigh in.

The dollar rose 0.26% against the yen to 157.89, with traders preparing for next week’s Bank of Japan policy meeting, where markets are pricing in a 57% chance of a rise.

Some analysts have flagged that the most important battlefield in the forex market today is the dollar / yuan – as the People’s Bank of China (PBOC) manages to hold the line even as depreciation pressure is intensifying.

The PBOC has unveiled several measures in recent days to support the weak currency.

The yuan was flat, changing hands at 7.3454 per dollar on Tuesday.

CASH

bid

prices of

14

JANUARY

08:14

in GMT

Description RIC Last US Pct YTD Pct High Low

in Close Change Bid Bid

ago

Session

Dollar 109.27 109.42 -0.13% 0.72% 109.76 109.

index 2

Euro/Dollar 1.0297 1.0245 0.51% -0.54% $1.0306 $1.0

and 239

Dollar/Ye 157.91 157.61 0.18% 0.34% 158.15 157.

No. 12

Euro/Yen 162.61 161.32 0.8% -0.37% 162.8 161.

2

Dollar/Sw 0.9126 0.917 -0.47% 0.56% 0.9173 0.91

is 24

Sterling/ 1.2195 1.2203 -0.06% -2.49% $1.2251 $1.2

Dollar 14

Dollar/Ca 1.4365 1.438 -0.1% -0.1% 1.441 1.43

nadian 44

Aussie/Do 0.6184 0.6176 0.15% -0.03% $0.6207 $0.6

167

Euro/Swiss 0.9396 0.9392 0.04% 0.03% 0.9416 0.93

s 78

Euro/Star 0.844 0.839 0.6% 2.02% 0.845 0.83

dizzy 86

NZ 0.5596 0.5583 0.25% 0.03% $0.5631 0.55

Dollar/Do 8

ll

Dollar/No 11.3907 11.4276 -0.32% 0.22% 11.4415 11.3

rway 74

Euro/Norw 11.7303 11.7006 0.25% -0.33% 11.74 11.6

is 781

Dollar/Sw 11.1817 11.2445 -0.56% 1.49% 11.2513 11.1

Eden 707

Euro/Swed 11.5136 11.523 -0.08% 0.42% 11.5285 11.5

in 001