Investing.com – The US dollar fell Tuesday amid uncertainty over Trump’s tariffs policy, but remained near two-year highs ahead of the release of the first of the week’s key inflation data.

At 04:15 ET (09:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.4% lower to 109.325, after climbing to a 26-month high on Monday.

Dollar retreats from highs 

The dollar slipped from its highs Tuesday following a Bloomberg report that suggested the Trump administration could take a gradual approach to tariffs.

The dollar had received a boost earlier this year after the President-elect vowed to impose steep tariffs on several countries, including a 60% duty on China, from “day one” of his term.

That said, the greenback remains elevated after a strong report on Friday reinforced support for the US central bank’s cautious stance toward further monetary policy easing this year.

The cut the number of rate cuts projected for 2025 to two at its December meeting, from four in September, with policy members fretting about inflation remaining above target.

The focus this week is now on the US report due on Wednesday, preceded by later this session.

“This week’s US inflation data could potentially reinforce the dollar’s strong momentum and cast further doubts on whether the Fed needs to cut at all,” said analysts at ING, in a note. 

“Tomorrow’s CPI should have the biggest market impact, but today’s PPI is still highly relevant, especially as many of the PPI components feed into the Fed’s preferred measure of inflation – the core PCE.”

Sterling under pressure

In Europe, traded 0.1% higher to 1.2214, after falling to 1.21 on Monday, its lowest since November 2023.

The pound has struggled this year as surging gilt yields, and thus higher borrowing costs, have prompted fears that the new Labour government may be forced to rein in spending or raise taxes to meet its fiscal rules, potentially weighing on future growth.

There is an abundance of UK economic data to study this week, starting on Wednesday with the latest .

“Gilts have remained under pressure, following the global bond underperformance. There is now a tangible risk that 10-year yields will be trading above 4.90% before tomorrow morning’s UK CPI print. Should that come in hotter than expected, selling pressure can intensify into the 5.0% handle and potentially beyond,” said ING.

rose 0.1% to 1.0255, just above hovered near the more than two-year low of 1.0177 seen on Monday. 

The single currency has struggled at the start of the year after dropping more than 6% in 2024 as investors fret about the weak economic growth in the region and tariff threats.

There is sentiment data due later in the session from both and the to digest.

The widely expected to ease interest rates by around 100 basis points in 2025, with most of the cuts coming in the first half of the year.

BOJ meeting looms large

In Asia, climbed 0.2% to 157.77, after BOJ Deputy Governor Ryozo Himino said that the will debate whether to raise interest rates at a meeting next week.

Speculation over more rate hikes by the BOJ has grown in recent weeks, following strong wage growth and household spending data. Japanese inflation has also consistently remained above the BOJ’s 2% annual target in recent months.

traded largely unchanged at 7.3311, remaining close to its highest level since September 2023, amid increased focus on more stimulus measures from Beijing. 

The People’s Bank of China is also set to decide on its benchmark this week.