SINGAPORE/LONDON, March 9 (Reuters) - The dollar held near a three-month high on Thursday, underpinned by Federal Reserve Chair Jerome Powell's message that interest rates would have to go higher and possibly faster.
The yuan weakened after the government reported unexpectedly low inflation.
In the second day of his testimony to Congress on Wednesday, Powell reaffirmed 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.
That caused the U.S. dollar to pause its sharp rally from earlier in the week, retreating from close to a three-month top against the yen . It was down 0.6% at 136.55 yen.
The euro and sterling similarly edged away from multi-month lows, flattening at $1.0555 and $1.1845, 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."
The U.S. dollar index edged 0.05% lower to 105.57, and remained near a three-month peak of 105.88 hit on Wednesday.
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 yuan weakened after China posted February data showing the slowest annual consumer price inflation in a year, 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 6.9803.
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 1.3795 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 $0.6612.
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.
Reporting by Rae Wee in Singapore and Joice Alves in London; Editing by Bradley Perrett