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The dollar was soft on Thursday as traders assessed the U.S. interest rates outlook in the wake of comments from Federal Reserve officials that cemented expectation of monetary settings remaining restrictive for a while longer.

The dollar has been rising in recent weeks as a slew of strong U.S. economic data and persistent inflation dashed expectation of rate cuts in the near term. Simmering tension in the Middle East also added to the dollar's safe-asset appeal.

Dollar strength has cast a shadow across currency markets, keeping the yen rooted near 34-year lows and leading to several warnings from Japanese authorities as traders fret about possible intervention. Emerging-market currencies have also been under pressure.

The U.S., Japan and South Korea agreed to "consult closely" on foreign exchange markets in their first trilateral finance dialogue on Wednesday, in a nod to concern from Tokyo and Seoul over their currencies' recent sharp declines.

On Thursday, the euro was a tad weaker at $1.0664, having notched a 0.5% gain on Wednesday and lifting away from a five-month low touched on Tuesday. Sterling was last at $1.2449, up 0.02% on the day.

The dollar index, which measures the U.S. currency against six peers, was last at 105.97, inching away from the five-and-a-half-month high of 106.51 hit on Tuesday as traders consolidated positions. The index is up 4.5% this year.

Markets are pricing in 44 basis points of cuts from the Fed this year, drastically lower than the 160 bps expected at the start of the year, with September becoming the latest starting point of the easing cycle, showed the CME FedWatch Tool.

Traders had earlier expected the Federal Open Market Committee (FOMC) to start cutting rates in June but a string of data including the consumer price index (CPI) and push-back from central bankers have altered that expectation.

U.S. economic activity expanded slightly from late February through early April and firms signalled they expect inflation pressure to hold steady, a Federal Reserve survey showed on Wednesday.

Fed Governor Michelle Bowman on Wednesday said progress on slowing U.S. inflation may have stalled, and it remains an open question whether rates are high enough to ensure inflation returns to the Fed's 2% target.

"In our view it will take a run of lower CPI readings for the FOMC to cut interest rates in September," said senior economist Kristina Clifton at Commonwealth Bank of Australia.

The yen strengthened 0.05% to 154.29 a dollar but remained close to the 34-year low of 154.79 touched on Tuesday. The currency is down 8.65% so far this year.

Market participants raised the bar of possible intervention by Japanese authorities to prop up the yen, now pinpointing the 155 level rather than the previous 152, even if they believed Japan could step in at any time.

"The overnight retracement in USD/JPY from ahead of 155 might be the type of encouragement that Japanese currency officials are looking for to resume their verbal support of the yen," said market analyst Tony Sycamore at IG.

Japan last intervened in the currency market in 2022, spending an estimated $60 billion to defend the yen.

Elsewhere, the Australian dollar was little changed at $0.6439, while the New Zealand dollar eased a bit to $0.5914 after spiking 0.6% on Wednesday.