© Reuters. FILE PHOTO: U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Rae Wee

SINGAPORE (Reuters) -The dollar was trying to find a floor on Tuesday in holiday-thinned trade, pressured by signs that inflation in the world’s largest economy is cooling which will likely give the Federal Reserve room to ease interest rates next year.

The yen meanwhile steadied near its recent five-month peak on the view that the Bank of Japan (BOJ) could soon mark an end to its ultra-easy policy. For most of 2022 and 2023, the policy has kept the Japanese currency under pressure as other major central banks embarked on aggressive rate-hike cycles.

Currency moves were largely muted in the day after Christmas, as markets in the UK, Australia, New Zealand and Hong Kong, among others, were still out for a public holiday.

Against the greenback, the New Zealand dollar scaled a fresh five-month peak of $0.6325, while the Australian dollar was similarly huddled near its recent five-month top and last bought $0.6817.

The euro edged 0.03% higher to $1.1024, not too far from a five-month top of $1.1040 hit last week, while sterling was little changed at $1.2706.

Data released on Friday showed U.S. prices fell in November from the previous month for the first time in more than 3-1/2 years and the annual increase in inflation slipped further below 3%, boosting market expectations of an interest rate cut from the Fed next March.

The reading came a week after Fed policymakers opened the door to rate cuts in 2024 at the central bank’s final policy meeting for the year, a move that drove the dollar lower.

“The Fed has made considerable progress on inflation, as core started the year closer to an annual rate of 5%, though the job is not yet done in ensuring inflation is on a sustained trajectory toward its 2% target,” Wells Fargo analysts said in a note.

The languished near a five-month low of 101.42 hit last week, and was last at 101.59.

In Asia, the yen rose 0.1% to 142.25 per dollar, drawing additional support from comments by BOJ Governor Kazuo Ueda.

Ueda said on Monday the likelihood of achieving the central bank’s inflation target was “gradually rising” and it would consider changing policy if prospects of sustainably achieving the 2% target increase “sufficiently”, though he said the BOJ had not decided on a specific timing to change its ultra-loose monetary stance.

“BOJ Governor Ueda did not provide any policy guidance in his speech yesterday, though he was hopeful that Japan was finally getting out of the low-inflation environment,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

A slew of data out on Tuesday showed Japan’s jobless rate was unchanged at 2.5% in November from the previous month, while business-to-business service inflation was steady at 2.3% last month.

Elsewhere, the Chinese yuan dipped against the greenback on rising expectations of further monetary easing measures from Beijing.

Five of China’s largest state banks lowered interest rates on some deposits at the end of last week, the third round of such cuts this year. Several listed banks have since followed suit, the official Shanghai Securities News reported on Tuesday.

The cuts could smoothen the People’s Bank of China’s (PBOC) move towards easing monetary policy, and will drive money into wealth management products and bond funds, Caitong Securities said in a report.

The edged 0.1% lower to 7.1433 per dollar, while its offshore counterpart last stood at 7.1461 per dollar.