The dollar gained 0.253% to 102.90, after having advanced 0.2% overnight in subdued trading on Monday

The dollar gained on Tuesday as investors pared back bets on near-term rate-cuts by the U.S. Federal Reserve after hawkish comments from European Central Bank officials, while concerns of more attacks on ships in the Red Sea weighed on risk sentiment.

Against a basket of currencies, the dollar gained 0.253% to 102.90, after having advanced 0.2% overnight in subdued trading during a U.S. public holiday on Monday.

The euro dropped 0.3% to $1.09185, set for its sharpest one-day percentage decline in two weeks. Sterling was last at $1.2681, 0.36% lower on the day, edging away from a near-five month high of $1.2825 touched late December.

Comments from ECB officials pushing back against early rate cuts cast a shadow on rates outlook globally. It is too early to talk about cuts, inflation is too high, ECB’s Joachim Nagel said on Monday, adding that the mistake of cutting interest rates too early should be avoided.

Money markets are pricing in 145 bps worth of cuts to the European Central Bank’s deposit rate this year, most likely starting in April.

The hawkish ECB commentaries last night have fuelled concerns that market pricing for the Fed rate path may also be aggressive, said Charu Chanana, head of currency strategy at Saxo.

Some safe-haven demand also likely to be at play with Red Sea disruptions rising, Chanana added.

Investors are now bracing for comments from the Fed’s Christopher Waller, whose dovish turn in late November helped to send markets surging in a strong year-end rally. Waller is due to speak later on Tuesday.

Markets are pricing in a 70% probability of a 25 bps cut in March from the Fed, versus 77% a day earlier, and 63% a week earlier, according to the CME FedWatch Tool, highlighting the shifting expectations on rate cuts.

However, traders are projecting cuts of over 160 basis points this year, up from 140 basis points of easing projected last week.

We think the market may have got ahead of itself pricing nearly seven 25 basis points cuts from the Fed this year, said Hamish Pepper, fixed income and currency strategist at Harbour Asset Management, adding the dollar is likely to find support if markets re-evaluate easing expectations and push short-term interest rates up.

Pepper added: Yes, inflation has dropped more quickly than expected, including core measures, but the labour market still looks too hot and may make it difficult for inflation to get all the way back to 2%.