By Rae Wee

SINGAPORE (Reuters) - The dollar's towering rally hit a speed bump on Wednesday as traders turned cautious ahead of a closely watched U.S. consumer inflation report due later in the day, making them hesitant to take on new positions.

The greenback was stabilising in the early Asian session after falling overnight and edging away from a more than two-year peak hit against a basket of currencies at the start of the week.

Its decline came in part due to a tame reading on U.S. producer prices, which pulled Treasury yields off their highs. [US/]

Against the dollar, the euro was some distance from a more than two-year trough and last bought $1.0301.

Sterling fell 0.09% to $1.2205, as it continues to come under pressure from rising borrowing costs at home and worries about Britain's fiscal health.

UK inflation data is similarly due later on Wednesday, which will be closely watched by investors as concerns about domestic price pressures and a weak economy put growing pressure on finance minister Rachel Reeves.

In the United States, markets are forecasting a 0.2% increase in core consumer prices on a monthly basis for December, and any upside surprise could further limit the scope for Federal Reserve rate cuts this year.

Wednesday's release comes on the heels of last week's blowout jobs report, which underlined the strength of the U.S. economy and led traders to heavily pare back bets of further Fed easing.

Still, analysts say any resultant impact on currencies from the inflation report is likely to be short-lived, given the market's focus remains chiefly on U.S. President-elect Donald Trump's impending return to the White House and his plans for tariffs in particular.

"Markets are still looking ahead to the incoming administration's policies and the impact on prices," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

"Even though FOMC officials are sounding more cautious about rate cuts recently, they are actually not so alarmed by the recent inflation readings. They are actually more worried about the future prospect of inflation under a second Trump term."

Ahead of Trump's inauguration on Jan. 20, investors have been highly sensitive to headlines around his policy plans, which analysts expect will stoke inflation in the world's largest economy.

The threat of tariffs along with expectations of fewer Fed rate cuts has in turn lifted Treasury yields and supported the greenback.

Against a basket of currencies, the dollar was last a touch higher at 109.23, but was some distance away from Monday's peak of 110.17, its strongest level since November 2022.

The yen was little changed at 157.98 per dollar, having drawn some support from the prospect of a rate hike from the Bank of Japan next week.

Elsewhere, the Australian dollar held to some of its overnight gains and was trading at $0.6186. The New Zealand dollar dipped 0.05% to $0.5601.

(Reporting by Rae Wee; Editing by Jamie Freed)