By Joice Alves

LONDON The dollar edged up ahead of the key U.S. inflation report due later on Wednesday, while the euro fell from a one-week high in the previous session with traders cautious ahead of an expected European Central Bank rate hike on Thursday.

The dollar index, which tracks the currency against six peers including yen, euro and sterling, held firm, though moves were subdued, up 0.1% to 104.70, as traders awaited the U.S. consumer price index (CPI) reading for August. The release comes just a week before Federal Reserve officials gather to decide on interest rate policy.

The consumer price index likely increased by 0.6% last month, according to a Reuters survey of economists. That would be the largest gain since June 2022 and would follow two straight monthly advances of 0.2%.

The central bank is largely expected to keep rates on hold at next week's meeting, according to CME's FedWatch Tool. The Fed's next move in November remains more uncertain.

"If inflation were to be within the framework of expectations or even come in slightly below that, those who expect the Fed to have reached the end of the rate cut cycle are likely to feel confirmed," said You-Na Park-Heger, FX analyst at Commerzbank.

Elsewhere, the euro edged 0.1% lower to $1.0742 ahead of the ECB meeting on Thursday.

Markets have raised their bets on further rate hikes and are now pricing in a 53% chance of a 25 basis point move this week.

A source told Reuters that the ECB expects inflation in the 20-nation euro zone to remain above 3% next year, bolstering the case for a 10th consecutive interest rate increase on Thursday.

"With fresh signs of inflationary pressures, investors also moved to price in a growing chance that the ECB would in fact go ahead with another hike tomorrow," said Jim Reid, strategist at Deutsche Bank.

Sterling slipped 0.3% to $1.2454, on track for its biggest daily drop in a week as UK economy contracted by 0.5% in July, a worse than expected 0.2% contraction in gross domestic product.

YEN RETRACES GAINS

The yen fell as traders further digested comments from Japan's top central banker on a possible early exit from its negative interest rate policy.

Influential ruling party lawmaker Hiroshige Seko on Tuesday also signalled his preference for ultra-loose monetary policy, after Kazuo Ueda's comments pushed up the yen and bond yields.

The dollar advanced 0.19% against the yen to 147.34. The yen has now firmly retraced Monday's surge, which was its biggest one-day percentage rise in two months following the remarks from Bank of Japan (BOJ) Governor Ueda over the weekend.

Data released earlier on Wednesday showed Japan's annual wholesale inflation slowed in August for an eighth straight month, although at 3.2% it remains above the central bank's 2% target.

The yen has come under pressure against the dollar as a result of growing interest rate differentials since the Fed began its aggressive rate-hike cycle last year while the BOJ maintained an ultra-loose monetary policy.

Since the yen weakened past the key 145 per dollar threshold last month, traders have been on alert for any signs of intervention from Japan to shore up the currency. A year ago, that level had prompted the first yen-buying intervention by the authorities since 1998.

(Reporting by Joice Alves in London, additional reporting by Brigid Riley in Tokyo; Editing by Alison Williams)