By Harry Robertson
LONDON (Reuters) -The dollar inched towards its highest level since November on Wednesday ahead of a Federal Reserve interest rate decision later in the day, after data on Tuesday showed more signs of inflationary pressure in the U.S. economy.
Meanwhile, the yen held steady after dipping overnight to its lowest level since suspected intervention by Japanese authorities on Monday.
The dollar index, which tracks the currency against six major peers, was last slightly higher at 106.33, after earlier nearing the 106.51 mark that would be the highest since Nov. 1.
Global markets were somewhat subdued with traders in many countries off for May Day or International Workers' Day.
The euro was flat at $1.0669, after falling 0.52% the previous day when the U.S. data pushed the dollar higher.
Figures released on Tuesday showed that growth in U.S. labour costs accelerated in the first quarter of the year, with the employment cost index (ECI) rising 1.2%, more than the 1% expected by economists.
A string of stronger-than-expected data has caused investors to rein in their bets on how much the Fed will cut interest rates this year. Traders on Wednesday expected just 29 basis points of cuts by December, down from more than 170 basis points at the start of the year.
Expectations that rates will stay higher for longer has pushed up U.S. bond yields sharply, making them more attractive and boosting the dollar.
"The relentless stream of above-expected U.S. inflation data continues," said Chris Turner, global head of markets at ING. "Yesterday it was the turn of the employment cost index to surprise on the upside."
FOCUS ON POWELL
The Fed is expected to leave rates at 5.25% to 5.5% when it announces its decision at 2 p.m. ET (1800 GMT) on Wednesday, but the focus will be on Chair Jerome Powell's comments on the recent data.
"Jerome Powell will have to acknowledge that U.S. price trends have reversed higher, activity is holding up well and that any easing this year will have to be delayed," Turner said.
The Japanese yen weakened slightly to 157.91 per dollar, after earlier nearing the 158 mark.
Traders cited yen-buying by Japanese authorities as a trigger for a sharp rally in the currency on Monday to as high as 154.4 to the dollar, after it fell to its lowest since 1990 at 160.25.
Investors' expectations that Japanese interest rates will remain low relative to those seen in the U.S. have caused the currency to slump around 12% this year.
Strategists have said Japanese authorities could well step in to boost the currency in the coming days, judging by the pattern of repeated intervention in late 2022.
Sterling was last trading at $1.2484, down 0.1% on the day and off by 1.9% for the year.
The Swiss franc fell to its lowest since October on Wednesday at 0.9223 per dollar. The slide in the franc follows a surprise Swiss National Bank interest rate cut in March.
Bitcoin slid by almost 6% to below $58,000 as investors reduced their bets on Fed rate cuts this year, dealing a blow to rate-sensitive assets such as cryptocurrencies.