By Hannah Lang

WASHINGTON (Reuters) – The U.S. dollar retreated from a more than two-month high on Wednesday after a Federal Reserve official warned any decision by the central bank to hold its benchmark overnight interest rate firm at an upcoming meeting would not mean that it is done tightening monetary policy.

In remarks on Wednesday, Fed Governor and vice chair nominee Philip Jefferson said that skipping a rate hike would allow the Fed “to see more data before making decisions about the extent of additional policy firming.”

Investors reset expectations after Jefferson’s comments, with prices of futures tied to the Fed’s policy rate reflecting only a one-in-three chance of a June rate hike. Earlier in the day, after the U.S. Labor Department reported job openings rose to 10.103 million in April, U.S. rate futures had priced in a 71% chance of a hike.

Federal Reserve Bank of Philadelphia President Patrick Harker also said Wednesday he is inclined to support a “skip” in interest rate hikes at the central bank’s next meeting in June.

Those comments let air out of the dollar index, which measures the greenback against six major peers and had climbed to 104.63 earlier in the day, its highest since March 16. It was last up 0.259% at 104.300.

The euro fell to $1.066 earlier in the session, the lowest since March 20, after data showed European inflation is cooling quicker than expected. It was last down 0.58% to $1.06735.

While the probable resolution of the U.S. debt ceiling standoff was likely keeping the dollar elevated, a final deal could eventually pave the way for investors to seek out more risk, said Juan Perez, director of trading at Monex USA.

“Risk appetite will make a comeback once we are able to at least digest and react to the very fact that the United States is going to be steady and A-okay. But until that happens and is established, the dollar will stick around to these levels,” he said.

Weak economic data out of China also boosted the U.S. currency, analysts said. A survey released on Wednesday showed that China’s factory activity shrank faster than expected in May, in the latest sign that the country’s recovery from COVID-19 lockdowns is faltering.

China’s yuan fell to its lowest since November, and was last down versus the greenback at 7.1197 per dollar.

“We’re seeing dollar strength after Chinese data came in weaker than expected. That was the main mover overnight,” said Chris Gaffney, president of world markets at TIAA Bank. “It gives investors a little something to worry about, if you will, about the global recovery and possibility that we’ll see the global economy slip into a recession.”

In a busy day in currency markets, the Japanese yen last strengthened 0.34% versus the greenback at 139.33 per dollar.

Sterling was last trading at $1.2422, up 0.08% on the day.

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