Market News

By Kevin Buckland and Amanda Cooper

TOKYO/LONDON (Reuters) -The dollar hovered around three-week highs against a basket of currencies on Tuesday, ahead of the release of U.S. inflation data that could give traders a steer on the near-term outlook for interest rates.

The dollar has also been underpinned by the gradual rise in recent weeks in Treasury yields, as investors weigh the odds that Federal Reserve Chair Jerome Powell might be forced to leave his role early, given U.S. President Donald Trump's repeated criticism of the head of the central bank.

The euro, the pound and the Swiss franc all recovered some of the previous day's losses, ahead of a barrage of data later in the day that includes U.S. inflation.

Meanwhile, bitcoin eased back to around $116,650, below Monday's all-time peak of $123,153.22 following a 14% surge in the space of a week, as investors bet on long-sought legislative policy wins for the cryptocurrency industry this week.

The euro was steady around $1.16698, after four straight days of losses.

"Today's U.S. CPI release (is) likely to be a decisive moment for the pair," BBVA strategist Roberto Cobos said.

"Stronger-than-expected inflation would reinforce the case for the Fed to maintain its cautious stance on rate cuts – likely offering near-term support for the dollar. However, a downward surprise in the U.S. CPI would make the wait-and-see approach harder to justify," he said, adding that this would drag the dollar lower.

Against the yen, the dollar was little changed at 147.92, after earlier rising to the highest since June 23 at 147.89 yen.

The dollar index, which tracks the currency against the yen, euro and four others, held at 98.097, just below the overnight peak of 98.136, the highest since June 25.

Powell has said he expects inflation to increase this summer as a result of tariffs, which is seen keeping the U.S. central bank on hold until later in the year.

Economists polled by Reuters expect headline inflation to increase to 2.7% on an annual basis, up from 2.4% the prior month. Core inflation is expected to rise to 3.0%, from 2.8%.

"Should inflation fail to materialise or remain steady, questions may arise regarding the Fed's recent decision not to cut rates, potentially intensifying calls for monetary easing," James Kniveton, senior corporate FX dealer at Convera, wrote in a client note.

"Calls from the White House for leadership changes at the Fed may increase."

Trump on Monday renewed his attacks on Powell, saying interest rates should be at 1% or lower, rather than the 4.25% to 4.50% range the Fed has kept the key rate at so far this year.

Fed funds futures traders have been pricing in about 50 basis points of interest rate cuts by year-end, with the first quarter-point reduction seen as likely in September.

Currencies barely reacted to data showing China's economy grew 5.2% last quarter, slightly topping analysts' forecasts - in a sign of resilience against U.S. tariffs.

The pound rose 0.15% to $1.1668 ahead of Bank of England Governor Andrew Bailey's annual "Mansion House" address to London's financial sector on Tuesday, along with finance minister Rachel Reeves.

(Reporting by Kevin Buckland; Editing by Lincoln Feast and Jacqueline Wong)