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The U.S. dollar and euro held firm on Wednesday as traders assessed European Central Bank's latest statements and waited to see whether data due this week will confirm that U.S. inflation is in retreat.

While traders awaited U.S. inflation data to help firm up Federal Reserve interest rate hike expectations, French ECB policymaker Francois Villeroy de Galhau said on Wednesday that interest rate hikes will need to come at a "pragmatic pace" in the coming months.

ECB staff published an article arguing that "very strong" wage pressures are likely over the next few quarters. But ECB's governing council member Mario Centeno said on Tuesday he expected inflation to fall again in March and the monetary tightening process was nearing its end.

The euro hovered around its strongest level against the dollar in seven months, flattening at $1.0732. The dollar index rose 0.2% to 103.45 against a basket of currencies including the euro.

"Euro/dollar remains gently bid, buoyed by expectations of a Fed U-turn in the second half of this year, China reopening and a belatedly hawkish ECB," said Chris Turner, ING head of currency Strategy.

The market still expects interest rates to peak at approximately 3.5%, followed by a reversal of European monetary policy in early 2024, with interest rates falling again, said Ulrich Leuchtmann, Head of FX at Commerzbank.

"Even though attention seems to focus almost exclusively on the dollar, one should not lose sight of what the ECB has to say," he added.

The dollar has lost almost 12% against euro since hitting a 20-year peak in September as investors have started to anticipate easing inflation and with it a softer dollar as the need for more interest rate hikes wanes.

But for the past month or so, the euro has struggled to make further headway, and traders have been cautious in selling dollars while the U.S. Fed continues to promise hikes and the global economic outlook is bleak.

U.S. INFLATION IN FOCUS

Fed Chair Jerome Powell did not give any policy clues during a panel discussion in Stockholm on Tuesday, and with other Fed officials saying their next moves will be data-dependent, investors are keenly focused on U.S. CPI data due on Thursday.

Futures pricing has been bumpy, but indicates markets' now lean toward a 3/4 chance of a quarter-point hike next month.

China's re-opening has also supported sentiment and lifted Asia's currencies against the dollar.

China's yuan was a whisker short of a five-month high at 6.7727 on Wednesday.

The Australian dollar was flat at $0.68900 after data showed the annual pace of inflation increased to 7.3% in November, leaving room for more rate hikes. [AUD/]