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The dollar was firm on Thursday after hotter-than-expected U.S. inflation data squashed lingering expectations of the Fed starting its rate-cutting cycle in June, while the yen languished at the levels last seen in the middle of 1990.

The yen's slide to a 34-year low of 153.24 per U.S. dollar on Wednesday brought intervention fears back as authorities in Tokyo reiterated that they would not rule out any steps to deal with excessive swings.

"Recent moves are rapid. We'd like to respond appropriately to excessive moves, without ruling out any options," Japan's top currency diplomat Masato Kanda said.

Japan intervened in the currency market three times in 2022 as the yen slid toward what was then a 32-year low of 152 to the dollar.

On Thursday, the yen strengthened 0.20% to 152.88 per dollar, just below the 153.24 level touched on Wednesday after data showed the U.S. consumer price index rose 0.4% on a monthly basis in March, versus the 0.3% increase expected by economists polled by Reuters.

Kyle Rodda, senior financial market analyst at Capital.com, expects Tokyo authorities to keep talking tough and intervene if things look disorderly.

"The very interesting element is how the Bank of Japan eventually handles this ... We might see greater hawkishness from here and that would be the catalyst for a more sustained turnaround," Rodda said.

Bank of Japan Governor Kazuo Ueda said on Wednesday the central bank would not directly respond to currency moves in setting monetary policy, brushing aside market speculation that the yen's sharp falls could force it to raise interest rates.

The Japanese central bank last month ended eight years of negative interest rates but yen has remained rooted near 151 per dollar levels since then.

Low Japanese rates have made the yen the funding currency of choice for carry trades for years, in which traders typically borrow a low-yielding currency to then sell and invest the proceeds in assets denominated in a higher-yielding one.

FED WAGERS

Following the inflation data, traders drastically dialled back their bets on interest rate cuts this year as well as when the Federal Reserve will start its easing cycle.

Adding to those doubts, minutes from the Fed's March meeting, released on Wednesday, show policymakers were already disappointed by recent inflation readings before the latest report.

Markets are now pricing in an 18% chance of the Fed cutting rates in June, compared with 50% before the CPI data, according to CME FedWatch tool, with September turning out to be the next starting point for rate cuts.

Traders are also pricing in 43 basis points of cuts this year much lower than the 75 basis points of easing projected by the U.S. central bank. At the start of the year, traders had priced in over 150 bps of cuts in 2024.

The latest trends in core CPI are moving in the wrong direction for the Fed to gain enough confidence on inflation by the time of the June FOMC meeting, according to Kevin Cummins, chief US economist at NatWest.

"We now expect the first cut (25 bps) to occur at the September meeting (instead of June) followed by two additional cuts this year."

The hot inflation report led to U.S. Treasury spiking higher and taking the dollar index, which measures the greenback against six rivals, more than 1% higher on Wednesday to near five month peak of 105.30. The index was last at 105.13 on Thursday.

The yield on 10-year Treasury notes eased a bit to 4.554% in Asian hours, hovering near the five month peak of 4.568% it touched on Wednesday.

The euro was last at $1.0744, having dropped 1% on Wednesday ahead of the European Central Bank meeting later in the day. The ECB is expected to stand pat on rates but the focus is on comments from officials to see whether June will be the starting point for cuts in the region.

Sterling was last at $1.2538, up 0.06% on the day. The Australian dollar was little changed at $0.651, while the New Zealand dollar eased 0.17% to $0.598.