NEW YORK, Jan 31 Reuters The dollar gave up gains made earlier on Tuesday after data showed U.S. labor costs increased less than expected in the fourth quarter, and before the Federal Reserve is expected to hike rates by 25 basis points on Wednesday.

The Employment Cost Index, the broadest measure of labor costs, rose 1.0 last quarter after increasing 1.2 in the JulySeptember period, the Labor Department said on Tuesday.

Still, it is not seen as likely to sway the U.S. central bank from hiking rates further.

Despite the fact that it came in below expectations, objectively speaking its still a pretty firm print that means that the Fed is still going to sound hawkish, said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto.

Fed funds futures traders are pricing for the Feds benchmark rate to peak at 4.93 in June, up from 4.33 now.

But investors are also bearish on the U.S. economy and see the Fed as having to cut rates back to 4.48 by December. This is despite Fed officials stressing they will need to keep rates in restrictive territory for a period of time in order to bring down inflation.

Fed Chair Jerome Powell and the FOMC will want to flag the fact that we are going to see higher rates for a little bit longer, its all about whether or not the market believes that narrative at this point, said Rai.

The dollar index was last little changed on the day against a basket of currencies at 102.24. It earlier rose to a twoweek high of…