*
Investors await CPI data on Wednesday
*
Euro in positive territory, yen weakens
*
Fiscal worries sill weigh on pound
(Updates to U.S. afternoon, adds FX table)
By Laura Matthews
Jan 14 (Reuters) - The dollar weakened against the euro on
Tuesday but stayed near its highest level in more than two years as
cooler-than-expected inflation data following last week's strong jobs
report made it hard to project the Federal Reserve's next moves on
interest rates.
Data showed U.S. producer prices increased moderately in December.
Investors had already started to scale back bets on rate cuts as
potential U.S. tariffs remained in the spotlight.
The greenback pared gains later in the session as traders
cautiously awaited Wednesday's consumer price index report. Investors
have been 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 now before CPI tomorrow, so we're seeing some pre-release
volatility that's keeping the dollar a touch depressed," said Helen
Given, associate director of trading at Monex USA in Washington.
"Tariff stories are the primary driver, it appears, for price action
today."
Traders are pricing the first rate cut in September, but less than
the 50 basis points the Fed projected in December.
With President-elect Donald Trump set to begin a second term next
week, the focus has been on his policies that analysts expect will
boost growth and price pressures.
The threat of tariffs along with fewer Fed rate cuts priced in has
lifted Treasury yields and supported the greenback.
However, on Tuesday the market refocused on the chance that U.S.
tariffs may be raised gradually, after a Bloomberg report suggested
the U.S. could take a measured approach.
Trump's Treasury pick Scott Bessent is expected to keep a leash on
U.S. deficits and use tariffs as a negotiating tool, mitigating the
expected inflationary impact of the U.S. 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."
Still, Matt Weller, head of market research at StoneX, said
Wednesday's CPI reading "will ultimately be more significant for the
central bank and therefore traders, who will be looking for a
corresponding cool reading as a green light to buy up risk assets."
The dollar index, which measures the greenback versus six
other currencies, was down 0.14% at 109.25, shy of the 26-month high
of 110.17 it reached on Monday. It hit 114.78 in October 2022, its
highest since 2002.
The euro was up 0.51% at $1.0297. It touched $1.0177 on
Monday, its lowest level since November 2022.
The single currency dropped more than 6% in 2024 as investors
fretted about tariff threats and the monetary policy divergence
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 versus the euro as concerns
about Britain's fiscal challenges continued to weigh.
The dollar rose 0.26% against the yen to 157.89, with
traders bracing for next week's Bank of Japan policy meeting, for
which markets are pricing in 57% chance of a hike.
Some analysts flagged that the most important forex market
battleground right now is the dollar/yuan - as the People's Bank of
China (PBOC) manages to hold the line even as depreciation pressure
intensifies.
The PBOC has unveiled a flurry of measures in recent days to
support its weak currency.
The yuan was flat, changing hands at 7.3454 per dollar on
Tuesday.
Currency
bid
prices at
14
January?
08:14
p.m. GMT
Descripti RIC Last U.S. Pct YTD Pct High Low
on Close Change Bid Bid
Previous
Session
Dollar 2
Euro/Doll 239
Dollar/Ye 12
Euro/Yen 2
Dollar/Sw 24
Sterling/ 14?
Dollar/Ca 44
Aussie/Do 167
Euro/Swis 78
Euro/Ster 86
NZ 8
llar
Dollar/No 74
Euro/Norw 781
Dollar/Sw 707
Euro/Swed 001
(Reporting by Laura Matthews in New York; Additional reporting by
Stefano Rebaudo; Editing by Jacqueline Wong, Kim Coghill, Alexander
Smith, Mark Heinrich and Richard Chang)
Line of Credit 
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