By Chuck Mikolajczak

NEW YORK (Reuters) - The dollar retreated on Tuesday, giving back some of its sharp gains a day earlier after an inflation reading came in below market expectations.

The Labor Department said the consumer price index increased 0.2% last month, below expectations of economists polled by Reuters for a 0.3% gain, after dipping 0.1% in March.

Still, inflation is likely to pick up steam in the coming months as U.S. tariffs lift the cost of imported goods.

"While the headline number for inflation was better than expected, there are indicators that tariffs have already pushed prices higher," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

"Turning down the temperature of tariffs is good as the price effects would start seeping into the consumer basket pretty quickly," he said. "The trade reset with China might mean the Fed can go back to business as usual and gradually resume cutting rates later this year."

The dollar index, which measures the greenback against a basket of currencies, fell 0.67% to 101.05, with the euro up 0.81% at $1.1177.

The greenback rallied more than 1% on Monday on optimism that a tariff deal between the United States and China could cool the trade war between the world's two largest economies, which had raised the risk of a global recession.

The dollar is still nearly 3% below its April 2 level, when President Donald Trump announced tariffs, prompting overseas investors to reduce their exposure to U.S. stocks and bonds. 

Against the Japanese yen, the dollar weakened 0.57% to 147.6, after rallying more than 2% a day before as the risk-on mood dented the appetite for safe-haven assets.

The greenback was down 0.54% to 0.841 against the Swiss franc after climbing 1.6% on Monday.

The dollar slipped 0.02% to 7.197 versus the offshore Chinese yuan, after falling to a six-month low of 7.1779.

The curtailment of U.S.-China trade tensions has led market participants to dial back odds of a recession, along with expectations for the timing and magnitude of interest rate cuts from the Federal Reserve this year.

Major brokerages, including Goldman Sachs, J.P. Morgan and Barclays, have recently scaled back their U.S. recession forecasts and their view of Fed policy easing.

A rate cut of at least 25 basis points is now seen as likely at the central bank's September meeting, compared with the prior view for a cut at the July meeting, according to LSEG data. About 51 basis points of cuts are now being priced in for 2025.

Sterling strengthened 0.95% to $1.3297 and was on pace for its biggest one-day gain since April 28.

Among cryptocurrencies, bitcoin gained 1.59% to $104,314.79 after rising as high as $105,716.07 on Monday, a 3-1/2-month high. Ethereum jumped 5.09% to $2,612.46 and was on track for its sixth gain in seven sessions.

(Reporting by Chuck Mikolajczak; additional reporting by Rae Wee and Linda Pasquini; editing by Mark Heinrich and Leslie Adler)