By Kevin Buckland
TOKYO (Reuters) - The U.S. dollar hovered close to a three-week peak versus major peers on Monday amid expectations the Federal Reserve will cut interest rates this week but then signal a measured pace of easing for 2025.
Bitcoin soared above $105,000 for the first time, buoyed by signs President-elect Donald Trump will go ahead with a potential strategic bitcoin reserve.
The yen struggled to recover following its worst week since September after Reuters and other news outlets reported that the Bank of Japan is leaning towards forgoing a rate hike on Thursday.
Sterling was also under pressure after data on Friday showed a surprise economic contraction. The Bank of England is due to announce a policy decision just hours after the BOJ.
The dollar got additional support from climbing U.S. Treasury yields. Traders are confident of a quarter-point Fed rate reduction on Wednesday but now expect officials to forgo a cut in January, according to CME's FedWatch tool.
With inflation running above the central bank's 2% annual target, Fed policymakers have stated that recent upticks are part of the bumpy path to lower price pressures and not a reversal of the disinflationary trend.
But analysts say they are also likely to be wary of renewed inflation with Trump set to take office in January.
"The U.S. economy has been resilient in the face of high interest rates, which means the potential for inflation to rise if the economy overheats is a problem the Fed will need to address," said James Kniveton, a senior FX dealer at Convera.
"There is concern that the incoming administration's policies may be inflationary, but as the Bank of Canada Governor commented earlier this month, decisions cannot be based on potential U.S. policy, and (Fed Chair) Jerome Powell may follow suit."
The U.S. dollar index - which tracks the currency against the euro, sterling, yen and three other top rivals - was steady at 106.86 as of 0053 GMT, after rising to 107.18 on Friday for the first time since Nov. 26.
The U.S. currency added 0.1% to 153.87 yen, and earlier touched 153.91 for the first time since Nov. 26.
Sterling rose 0.18% to $1.26315, pulling up from $1.26075 on Friday, its lowest point since Nov. 27.
The euro edged up 0.12% to $1.05155, after dipping to $1.045375 at the end of last week, its weakest since Nov. 26.
Bitcoin surged as much as 3.6% from Sunday's close to reach an all-time high of $106,533.
Trump suggested in an interview with CNBC on Friday that he plans to go ahead with a plan to build a U.S. bitcoin strategic reserve, similar to its strategic oil reserve.
On the campaign trail, Trump had promised to make the United States "the crypto capital of the planet."
The CNBC interview "has been a bit of a slow burner, but it's now resulted in that push above $105,000" for bitcoin, said Tony Sycamore, an analyst at IG.
"We're in blue sky territory here, and the next figure the market will be looking for is $110,000."