By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – The dollar rose against major currencies on Wednesday in choppy trading, gaining safe-haven bids as risk appetite worsened with stocks on the defensive amid hawkish comments from U.S. Federal Reserve officials that suggested more interest rate increases are likely to tame inflation.

Analysts, however, remained convinced that the currency has already hit its peak and is in the midst of an overall downtrend.

“The dollar will continue to sputter due to the tamer outlook for both U.S. inflation and Fed policy,” said Joe Manimbo, senior market analyst, at Convera in Washington.

“The dollar is likely to remain on a descending path as long as markets price in a material risk of U.S. rate cuts later this year.”

The greenback earlier fell across board after a slate of weak economic data backed expectations that the Fed may be nearing a pause in its rate-hiking cycle.

The earlier sell-off in the dollar came after the Bank of Japan maintained ultra-low interest rates. The yen initially gained sharply, but recovered on expectations for tighter policy in the coming months.

Fed officials on Wednesday, however, dampened expectations that the U.S. central bank is nearing the end of its tightening policy.

Cleveland Fed President Loretta Mester said the Fed needs to raise interest rates a “little bit” above the 5.00% to 5.25% range in order to bring inflation to heel.

St. Louis Fed President James Bullard, for his part, said the Fed should get the policy rate of interest above 5% “as quickly as we can” before pausing rate increases needed to battle an ongoing outbreak of inflation.

Their comments helped push U.S. stocks lower and extended a rally in Treasuries that weighed on yields.

In afternoon trading, the U.S. currency rose against the commodity-linked currencies such as the Australian, New Zealand, and Canadian dollars, which sensitive to risk appetite.

The Australian dollar fell 0.7% to US$0.6936, after hitting its highest since August last year. The New Zealand dollar traded flat on the day at US$0.6430. Earlier in the session, it rose to its highest level in a month.

Against the Canadian dollar, the buck rose 0.8% to C$1.3497.

The U.S. unit earlier dropped after data showed that U.S. retail sales fell more than expected in December, pulled down by declines in purchases of motor vehicles and a range of other goods. They fell 1.1% last month. Data for November was revised to show sales dropping 1.0% instead of 0.6% as previously reported.

A separate report from the Labor Department showed the producer price index for final demand decreased 0.5% in December after rising 0.2% in November. The PPI report followed data last week showing that monthly consumer prices fell for the first time in more than 2-1/2 years in December.

“The PPI and retail sales numbers show that there are disinflationary pressures going on,” said Juan Perez, director of trading at Monex USA in Washington.

U.S. manufacturing output also fell 1.3% in December, more than expected, data showed.

In Japan, the BOJ kept intact its yield curve control (YCC) targets, set at -0.1% for short-term interest rates and around 0% for the 10-year yield, by a unanimous vote. It also made no change to its guidance that allows the 10-year bond yield to move 50 basis points either side of its 0% target.

Some analysts said the BOJ was likely to tighten policy soon and the currency walked back some of its losses.

The dollar rose as much as 2.7% to 131.58 yen before gains were pared. It was last up 0.6% at 128.825 yen.

Sterling rose to a five-week high even as consumer price inflation fell to a three-month low as core CPI failed to moderate, remaining at 6.3%. The pound was last up 0.4% at $1.2336.

The euro was little changed $1.0790. It earlier posted sharp gains after European Central Bank member Francois Villeroy de Galhau said it was too early to speculate about what the central bank would do at the March meeting. Media reports on Tuesday said the ECB could slow its pace of tightening further in March.

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