SINGAPORE LONDON Reuters -- The dollar held near a three-month high on Thursday, underpinned by Federal Reserve Chair Jerome Powell's message that interest rates would have to go higher and possibly faster.
The yuan was weakened after the government reported unexpectedly low inflation.
In the second day of his testimony to Congress on Wednesday, Powell reaffirmed his message, though he struck a cautious note, saying that debate on the scale and path of future rate hikes was still underway and would depend on data.
The US dollar fell from a close to a three-month top against the yen after the U.S. dollar fell from close to a three-month high earlier in the week. It was down 0.6% at 136.55 yen.
The euro and sterling also fell away from multi-month lows, flattening at $1.0555 and $1.1845.
Powell conceded that the March decision is data-dependent, according to Thierry Wizman, Macquarie's global FX and rates strategist. The question facing us is whether January's economic reacceleration was a blip or a trend. The U.S. dollar index was 0.05% lower than 105.57, and was close to a three-month peak of 105.88 hit on Wednesday.
A series of U.S. strong economic data, pointing out persistent inflationary pressures, led to Powell saying on Tuesday that the Fed would likely need to raise interest rates more than expected.
The Fed funds futures now indicate a nearly 70% chance that the Fed will raise rates by 50 basis points this month, up from just about 9% a month ago.
U.S. rates are seen as having held above 5.5% through the end of the year.
The yuan weakened after China posted February data showing the slowest annual consumer price inflation in a year, fanning doubts about the pace of economic recovery.
The Chinese offshore yuan languished near the key psychological level of 7 per dollar, and was last 0.2% lower at 6.9803 on the day.
The Bank of Canada left its overnight interest rate at 4.50%, which is a sign that major central banks are beginning to pause their monetary tightening campaigns.
The Canadian dollar fell to an almost five-month low on Thursday, and was last flat at 1.3795 per U.S. dollar.
The Australian dollar was under downward pressure and for a similar reason, even though it was last 0.3% higher at $0.6612.
The Reserve Bank of Australia Governor Philip Lowe said on Wednesday that the central bank was closer to pausing on rate hikes and suggested a halt could come as soon as April.
Lowe seemed open to a growing divergence in the path of monetary policy between Australia and the U.S., said Belinda Allen, senior economist at Commonwealth Bank of Australia.