Dollar retreats from two-year high, but set for weekly gain
US government faces partial shutdown if spending bill not passed
Euro edges higher but set for third-straight weekly loss
Updates prices throughout, adds analyst comments
By Chibuike Oguh
NEW YORK, Dec 20 (Reuters) - The U.S. dollar pulled back from a two-year high on Friday, but was heading for its third-straight week of gains, with data showing a slowdown in inflation two days after the Federal Reserve and indicated inflation was stubborn enough to scale back cuts in 2025.
The dollar was down 0.72% against a basket of six other currencies at 107.64 after spiking as high as 108.54 - its highest level since November 2022. It was set to end the week 0.72% higher.
Commerce Department data showed the price index - the Fed's preferred inflation gauge - rose 0.1% in November after an unrevised 0.2% gain in October.
But in the 12 months through November, the PCE price index advanced 2.4%, compared with a 2.3% increase in the year to October.
The Fed cut interest rates by 25 basis points on Wednesday, with officials indicating that fewer cuts were coming in 2025 as inflation remained above the targeted range despite its recent downward trajectory.
The yield on benchmark U.S. 10-year notes fell 6.2 basis points to 4.51%, after hitting a 6-1/2-month high following the Fed's rate decision.
"The inflation numbers today were more benign than feared; the Fed tilted its focus back towards inflation in this week's meeting, and then the numbers weren't so worrisome," said Adam Button, chief currency analyst at ForexLive.
"I think the market heard the words of the Fed and got worried about inflation. But then the numbers show that it's still slowing and certainly not at worrisome levels.
The U.S. government will begin a if Congress does not extend a deadline for a spending bill backed by President-elect Donald Trump to pass by midnight on Friday. The bill failed to pass in the House of Representatives on Thursday.
The dollar weakened 0.79% to 0.892 Swiss francs , on track for a weekly loss.
The euro edged higher after dipping to a one-month low of $1.03435 on the session, on track for its third-straight week of losses, weighed down partly by Trump's that the European Union must purchase more U.S. oil and gas to make up for its "tremendous deficit" with the world's largest economy, or face tariffs. It was last up 0.76% at $1.044175.
The dollar dropped to a five-month low of 157.93 Japanese yen after the Bank of Japan left interest rates unchanged. It was last down 0.89% at 156.01 yen.
Sterling dipped to a one-month low of $1.2475 but was last up 0.77% at $1.25990, still on track for a third straight week of losses. The Bank of England kept interest rates on hold on Thursday.
The dollar weakened 0.18% to 7.295 Chinese yuan on the offshore market. The Australian dollar weakened 0.43% to $0.6263, while New Zealand's dollar strengthened 0.53% to $0.566.
"You basically have an interest rate play between Wednesday's Fed meeting and it's not so much what they did, but the catalyst was the change in the economic projections for the Fed funds rate next year," said Joseph Trevisani, senior analyst at FXStreet.com.
"The market is seeing that the Fed is pulling back. I've long thought they would pause in January. I'm pretty sure they will."
World FX rates https://tmsnrt.rs/2RBWI5E [https://tmsnrt.rs/2RBWI5E]
(Reporting by Chibuike Oguh, Karen Brettell, Rae Wee and Greta Rosen Fondahn; Editing by Jacqueline Wong, Jamie Freed, Hugh Lawson, William Maclean, Kevin Liffey and Rod Nickel)
((Greta.RosenFondahn@thomsonreuters.com [Greta.RosenFondahn@thomsonreuters.com]))
