On Thursday, the dollar held near three-month high, supported by remarks made by Federal Reserve Chair Jerome Powell, who said that interest rates would need to rise and probably more quickly than investors had anticipated.

The yuan fell after China reported unexpectedly low inflation.

During the second day of his testimony to Congress on Wednesday, Powell reaffirmed his point, although he did so cautiously, stating that the size and direction of future rate hikes were still being debated and would be determined by data.

The U.S. dollar index eased 0.1% to 105.44 but was within sight of Wednesday’s three-month high at 105.88.

The dollar last traded at 136.29, down 0.8% against the yen, while the euro and sterling also made slight gains.

The Sterling increased by 0.4% to $1.1885, and the euro last increased by 0.1% to $1.0555. Compared to the dollar, the pound has decreased by 1.5% this week, underperforming both the euro and the yen, which have decreased by 0.7% and 0.3%, respectively.

Powell acknowledged that the March decision is data-dependent, according to Thierry Wizman, global FX and rates strategist at Macquarie. “The issue is whether the economic reacceleration in January was a one-off or a pattern.”

Powell stated on Tuesday that the Fed would probably need to hike interest rates more than expected due to many recent positive economic statistics from the United States that indicate sustained inflationary pressures.

According to Fed funds futures, the probability that the Fed will increase rates by 50 basis points this month is now almost 70%, up from just 9% a month ago.

U.S. rates are also seen holding above 5.5% through to the end of the year.

The fact is that markets are gradually coming to understand that rates will stay higher for longer and that the terminal rate is also likely to settle at a much higher level, according to Michael Hewson, chief strategist at CMC Markets.

After China released data indicating the lowest annual inflation of consumer prices in a year in February, the yuan declined as concerns about the speed of the global economic recovery grew.

The Chinese offshore yuan last traded at 6.981, down 0.2% on the day, as it remained stuck close to the crucial psychological milestone of 7 per dollar.

RATE HIKES ON PAUSE

The Bank of Canada on Wednesday left its key overnight interest rate on hold at 4.50%, a sign that major central banks are beginning to pause their monetary tightening campaigns.

The Canadian dollar dropped to a nearly five-month low on Thursday and last traded flat at 1.3805 to the US dollar.

The Australian dollar was likewise kept under downward pressure for a similar reason, though was last 0.3% higher at $0.6611.

On Wednesday, Reserve Bank of Australia Governor Philip Lowe said the central bank was closer to pausing on rate hikes and suggested a halt could come as soon as April.

According to Belinda Allen, senior economist at Commonwealth Bank of Australia (OTC:CMWAY), “Lowe sounded receptive to a widening divergence in the course of monetary policy between Australia and the U.S.”.