Dollar holds near seven-month lows as traders await inflation data

The dollar was little changed versus the euro and other major currencies on Tuesday, hovering around its weakest level in seven months as investors positioned themselves ahead of key inflation report later in the week.

The euro EUR=EBS edged up 0.01% against the greenback to $1.0733 at 10:30 am EST (1530 GMT), just below its seven-month high of $1.07605 hit Monday. Sterling GBP=D3 dipped 0.24% to $1.2151, just below Monday's three-week top.

The dollar has been trending lower as market participants question whether the US Federal Reserve will have to increase interest rates beyond 5% to curb inflation, as the effects of last year's aggressive rate hikes have already begun to show.

Data last week showedthat while the US economy added jobs at a solid clip in December, wage growth slowed, while another report showed that services activity weakened.

Investors now expect rates to peak just under 5% by June, before starting to come down later in the year. 

Atlanta Fed Bank President Raphael Bostic and San Francisco Fed President Mary Daly said on Monday that rates have further to go and will remain at elevated levels.

But Fed Chair Jerome Powell avoided speaking about rate hikes in a speech in Sweden on Tuesday.

"Until a more hawkish Fed narrative emerges, the dollar is likely to remain under pressure," said Win Thin, global head of currency strategy at Brown Brothers Harriman, who added that current dollar weakness may be overdone.

The pause in the dollar's decline comes as traders ready themselves for US Consumer Price Index (CPI) inflation data on Thursday.

"Markets are realizing we've reduced exposure to the dollar ahead of CPI, and there is still a sizable risk that US inflation conditions remain more persistent and the Fed has called it right and are going to have to hold rates higher for longer," said Simon Harvey head of FX analysis at Monex Europe.

The US dollar index =USD which tracks the greenback against a basket of currencies, with the euro given the greatest weight, was up 0.097% at 103.27, having tumbled 0.7% and touched a seven-month low of 102.93 in the previous session.

China's rapid reopening of its borders following pandemic restrictions also provided another boost toward riskier assets and currencies this week away from the safe haven appeal of the greenback, particularly moving China-linked currencies.

The China-sensitive Australian dollar AUD=D3 spiked at a more than four-month peak of $0.6950 in the previous session. It was last 0.51% lower at $0.6878.

The offshore yuan CNH=D3 last traded at 6.7878 per dollar, after hitting its strongest in five months of 6.7590 earlier in the session.

The dollar edged 0.13% lower versus the yen JPY=EBSto 132.065. The Japanese currency has been broadly strengthening after the Bank of Japan's (BOJ) surprise tweak to its yield curve policy late last year.