Markets are looking to the US consumer price index (CPI) data for further clues on Federal Reserve's policy outlook, with the headline number expected to rise 0.5 percent in January, according to a Reuters poll, after falling 0.1 percent in December.

The dollar index, which measures the US currency against six major rivals, eased 0.107 percent to 103.09, having slipped 0.34 percent overnight.

The index is up 1 percent for the month of February but is far off the 20-year peak of 114.78 it touched in September when the Fed was in the midst of its jumbo rate hikes.

Since then the Fed has tempered its pace of rate hikes. The US central bank earlier this month raised interest rates by 25 basis points but said that it was turning the corner in its fight against inflation.

Moh Siong Sim, a currency strategist at Bank of Singapore, said the foreign exchange market on Tuesday was in a holding pattern as the focus moves to the CPI data.

The debate right now is whether inflation will be stuck at 3 to 4 percent or move lower to 2 percent in line with the market's earlier hopes, Sim said.

"The odds are shifting to a more reasonable assessment that we might possibly get stuck at 3-4 percent and the Fed will have to do more."

The market is pricing US interest rates to peak at around 5.2 percent in July and ending the year at 4.9 percent, moving away from earlier expectations for the start deeper rate cuts later this year. 

With Fed Chair Jerome Powell reiterating that disinflation was underway last week, investors will parse through Tuesday's report to gauge the direction of prices.

Kristina Clifton, a senior economist at Commonwealth Bank of Australia, said there are tentative signs of US inflation cooling but said services inflation, which is strongly linked to wages growth, has shown no signs of softening.

"While the labor market remains tight and wages growth very strong, there is the risk that we receive upside surprises on the underlying inflation figures," she said.

The euro was up 0.14 percent at $1.0735, having risen 0.435 percent the previous session. Sterling was last trading at $1.2147, up 0.10 percent on the day, after rising 0.68 percent.

The Australian dollar added 0.10 percent to $0.697, while the kiwi fell 0.06 percent to $0.635.

New BOJ governor

Japan's government named academic Kazuo Ueda as its pick to become the next central bank governor, with investors betting that the surprise choice could preclude an end to the unpopular yield control policy.

Ueda, a former BOJ policy board member and an academic at Kyoritsu Women's University, is considered an expert on monetary policy but had not even been seen as a dark horse candidate for the top job.

National Australia Bank's currency strategist Rodrigo Catril said Ueda is regarded as a sensible choice as he is not a fully committed "uber dove" and he should have more flexibility as an outsider.

The Japanese yen strengthened 0.46 percent to 131.82 per dollar on Tuesday, having slipped 0.7 percent in the previous session.

The yen dropped sharply last year to a 32-year low of 151.94 per dollar as US rates rose and Japanese rates stayed near zero, but it has since recouped those losses as the Fed looks to pause its tightening while speculation increase that the BOJ will move away from its ultra-loose policy.

Data on Tuesday showed Japan's economy averted recession but rebounded much less than expected in October-December as business investment slumped, meaning an exit from stimulus will prove a challenge for the BOJ.

"We believe that the modest recovery will continue this year, but today's data support the Bank of Japan’s argument that the recovery is still fragile and that easy monetary policy is needed," ING economists said in a note.

"The incoming new governor will find it difficult to start any normalization."