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By Ankur Banerjee
SINGAPORE, Jan 16 (Reuters) - The dollar was firm on Tuesday as investors assessed the chances of early and steep interest rate cuts from the Federal Reserve, ahead of a data-packed week that could influence major central banks' thinking on monetary policy.
The yen weakened slightly to 145.89 per dollar after data showed Japan's wholesale inflation was flat in December from a year ago, slowing for the 12th straight month.
The data suggest that rises in consumer inflation will moderate in coming months and take pressure off the Bank of Japan (BOJ) to phase out its massive stimulus soon.
Expectations of a policy shift from the BOJ had bolstered the yen towards the end of 2023, with the currency gaining 5% against the dollar in December. It has since dropped sharply and is down 3% so far in January.
Investors scaled back their expectations of early rate cuts from the Fed at the start of the year but data last week that showed an unexpected drop in U.S. producer prices in December reinforced the view that cuts could come as soon as March.
Markets are now pricing in a 70% chance of a 25 basis points (bps) cut in March, versus 63% a week earlier, the CME FedWatch Tool showed. Traders are back projecting cuts of 160 bps this year, up from expectations of 140 bps last week.
Most analysts, though, think the expectations are too aggressive.
"We think the market may have got ahead of itself pricing almost seven 25 bp cuts from the Fed this year," said Hamish Pepper, fixed income and currency strategist at Harbour Asset Management, adding the dollar is likely to find support if markets reassess easing expectations and push short-term interest rates higher.
"Yes, inflation has fallen more quickly than expected, including core measures, but the labour market still looks too hot and may make it difficult for inflation to get all the way back to 2%."
Against a basket of currencies, the dollar rose 0.234% to 102.88 having gained 0.2% overnight in subdued trading on the account of a U.S. public holiday on Monday.
A data-heavy week awaits, with reports on Chinese fourth-quarter growth, British inflation and U.S. retail sales all scheduled for Wednesday.
Investor attention will also be on comments from central bank officials, including the Federal Reserve's Christopher Waller, whose dovish turn in late November helped to send markets soaring to a blistering year-end rally. Waller is due to speak later on Tuesday.
Chris Weston, head of research at Pepperstone, said the risk is that Waller could push back on market pricing for a March cut and show a lack of urgency to normalise policy.