LONDON, May 11 Reuters The dollar held close to a twodecade high on Wednesday as investors waited for the latest U.S. inflation data to assess how aggressively the Federal Reserve will have to tighten monetary policy to keep rising prices in check.

The dollar index , which measures the currency39;s strength against a basket of six other units, was on the back foot in midday European trading, slipping 0.34 to 103.59.

But while expectations are for U.S. inflation to have softened to 8.1 annually in April against 8.5 in March, the dollar was still within reach of 104.19 its strongest since December 2002 hit at the start of the week.

Clearly markets are sitting on their hands until we get the CPI reading, said Jeremy Stretch, head of G10 FX strategy at CIBC.

The dollar has climbed more than 8 this year as the Fed grows increasingly hawkish. Last week the central bank raised its benchmark overnight interest rate by 50 basis points, the largest hike in 22 years.

Markets are pricing in another hike of at least 50 basis points at its June meeting, according to CME39;s FedWatch Tool.

Stretch argued that softer inflation could encourage the U.S. central bank to slow down the pace of interest rate hikes to 25 basispoint increases after the summer.

Lower than expected U.S. inflation data would also likely support the euro and could help the currency reach 1.06 when the data is published later in the session, Stretch said.

The common currency was up 0.26 to 1.0557, having…