By Ankur Banerjee

SINGAPORE (Reuters) – The dollar remained stable on Monday following modest U.S. inflation data that alleviated concerns about the pace of U.S. rate cuts for next year. The yen lingered around 156 per dollar, raising intervention possibilities.

Investor sentiment improved as Congress passed spending legislation, averting a U.S. government shutdown early Saturday.

As the year-end approaches, trading volumes are expected to thin during this holiday-shortened week.

Last week, the Federal Reserve surprised markets with a forecast for measured rate cuts, pushing Treasury yields and the dollar higher, while negatively affecting other economies, especially in emerging markets.

Data released on Friday from the Fed's favored inflation gauge displayed moderate monthly price increases, with a key measure of underlying inflation showing its smallest rise in six months. However, annual core inflation, excluding food and energy, remains significantly above the Fed's 2% target.

Traders are anticipating 44 basis points in rate cuts next year, just shy of the two 25 basis point cuts projected by the Fed last week, and market expectations have delayed the first easing to June 2025.

This left the dollar index, which gauges the currency against six major peers, unchanged at 107.78 on Monday, close to a two-year high of 108.54 touched on Friday.

The euro was at $1.0434, near a two-year low encountered in November, showing a 5.5% decline this year.

Brian Jacobsen, chief economist at Annex Wealth Management, noted, "When optimism rises and market multiples expand, a bit of fear can quickly undermine a market rally. This year had many setbacks that at the time felt like existential crises. Perhaps the Fed's adjustment from four cuts to two in 2025 is just another bump in the road."

The dollar’s strength, coupled with the Bank of Japan’s decision to maintain its position and Governor Kazuo Ueda's comments, has kept the yen near weak levels, heightening the risk of intervention.

Currently, the yen is priced at 156.65 per dollar, close to a five-month low. After dropping to multi-decade lows earlier this year, the yen has struggled under pressure from a strong dollar and wide interest rate gaps, being more than 10% down this year and on track for a fourth consecutive yearly decline.

Kyle Rodda, senior financial market analyst at Capital.com, commented on the situation: "Entering a thinner liquidity period elevates the risk of rapid currency moves, potentially pushing the yen toward levels that could prompt intervention. The U.S. inflation data from Friday will assist Japanese authorities, as the yen’s depreciation concerns are tied to inflation and rate risks in the U.S."

In other currency news, sterling remained stable at $1.25715, while the Australian and New Zealand dollars showed steadiness after reaching two-year lows last week. The Australian dollar reached $0.6247, while the New Zealand dollar dipped 0.2% to $0.5645.

In the cryptocurrency market, bitcoin edged lower to $94,215.