By Rae Wee and Joice Alves
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 will have to go higher and possibly faster than investors previously anticipated.
The yuan fell after China reported unexpectedly low inflation.
In the second day of his testimony to Congress on Wednesday, Powell reiterated his message, though he struck a cautious note, saying debate on the scale and path of future rate hikes was still underway and would depend on data.
The U.S. dollar index eased 0.1% to 105.44, but was within sight of Wednesday's three-month high at 105.88.
It was last down by 0.8% against the yen at 136.29, while the euro and sterling both edged up.
The euro was last up 0.1% at $1.0555, while sterling rose 0.4% to $1.1885. The pound has lost 1.5% this week against the dollar, underperforming the euro and the yen, which have lost 0.7% and 0.3% against the U.S. currency, respectively.
"Powell conceded that the March decision is data-dependent," said Thierry Wizman, Macquarie's global FX and rates strategist. "The question facing us, therefore, is whether January's economic reacceleration was a blip or a trend."
A slew of U.S. strong economic data in recent weeks, pointing to persistent inflationary pressures, led to Powell saying on Tuesday that the Fed would likely need to raise interest rates more than expected.
Fed funds futures now imply a nearly 70% chance the Fed will raise rates by 50 basis points this month, up from just about 9% a month ago.
U.S. rates are also seen holding above 5.5% through to the end of the year.
"The reality remains that markets are slowly starting to come to the realisation that rates are likely to remain higher for longer and that the terminal rate is also likely to settle at a much higher level," CMC Markets chief strategist Michael Hewson said.
The yuan weakened after China posted data showing the slowest annual consumer price inflation in a year in February, 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 on the day at 6.981.
RATE HIKES ON PAUSE
The Bank of Canada on Wednesday left its key overnight interest rate on hold at 4.50%, in a sign that major central banks are beginning to pause their monetary tightening campaigns.
On Thursday, the Canadian dollar weakened to an almost five-month low and was last flat at 1.3805 per U.S. dollar.
The Australian dollar was likewise kept under downward pressure and for a similar reason, though was last 0.3% higher at $0.6611.
Reserve Bank of Australia Governor Philip Lowe on Wednesday said 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.