By Laura Matthews

NEW YORK (Reuters) -The dollar pared some losses against major peers on Wednesday but stayed weaker as cooler-than-expected data eased fears that inflation was accelerating and increased the chances the Federal Reserve could cut interest rates twice this year.

The Bureau of Labor Statistics showed consumer prices rose 2.9% in the 12 months through December, in line with economists' expectations. Core inflation, which excludes food and energy prices, came in as expected, but lower than the previous month.

Softer core reading coupled with producer prices data on Tuesday triggered an immediate decline in the dollar.

The dollar index, which measures the greenback against six other units, was down 0.1% at 109.07. It hit a 26-month high of 110.17 on Monday.

"The cooler inflation print was a sign for traders to cut some long positions in the dollar, said Joseph Trevisani, senior analyst at FX Street in New York.

Trevisani thinks the Fed will be very wary about resuming rate cuts until there's absolute certainty that inflation is headed back down. He doesn't think it.

With President-elect Donald Trump returning to the White House next week, analysts expect some of his policies to boost growth as well as increase price pressures.

John Velis, head of FX and macro strategy for the Americas, at BNY Markets, said going forward markets will be watching future inflation reports to see if they confirm the slow disinflation progress.

But the new incoming administration will likely enact policies that upend many baseline expectations for the first part of the year, he added.

"We expect the Fed to stand pat on January 29th, and rate cuts not to resume until much later in the year, pending disinflation's progress," said Velis.

Meanwhile the dollar was down 0.93% on the Japanese yen at 156.49 yen.

The yen strengthened on Wednesday after comments from the Bank of Japan Governor Kazuo Ueda, who said the central bank would raise interest rates and adjust the degree of monetary support if improvements in the economy and price conditions continue.

Meanwhile, a cooling in British inflation offered relief to the pound. Data showed inflation slowed unexpectedly last month and core measures of price growth - tracked by the Bank of England - fell more sharply - welcome news for finance minister Rachel Reeves after a market selloff.

The British pound was last seen up 0.1% at $1.2229 against the dollar, while the euro was down 0.15% at $1.0299.

"Dollar strength is not going to end because of this (CPI)number," said Peter Vassallo, FX portfolio manager at BNP Paribas Asset Management. "It's going to probably become more nuanced, and we might see the dollar continue to be strong against the European currencies, but not as strong against the yen."

Israel's shekel rose as much as 0.8% against the dollar to its strongest in a month and was last up 0.4% at 3.61 per dollar, after a Gaza ceasefire deal was reached on Wednesday. International government bonds issued by Israel and Jordan rose on the news.

Eyes were also on China, where the onshore yuan stayed flat on the day and was last at 7.3319 per dollar, overall maintaining a generally weak bias despite a persistently firmer than expected official guidance fix and signs of tightness in domestic money markets.

(Reporting by Laura Matthews in New York; Additional reporting by Alun John in London and Rae Wee in Singapore; editing by Mark Heinrich and Nick Zieminski)