NEW YORK (Reuters) - The dollar retreated from two-month highs on Monday as investors evaluated whether a perceived hawkish tilt by the Federal Reserve last week will mark a pause in the dollar bear trend that has been in play since March 2020. The dollar has surged since the U.S. central bank on Wednesday said that policymakers are forecasting two rate hikes in 2023. That led investors to re-evaluate bets that the U.S. central bank will let inflation run at higher levels for a longer time before hiking rates. The greenback dropped on Monday but held above where it traded before the Fed’s statement on Wednesday. “There was a rush to clean out outstanding positions that were a little bit maybe too skewed towards dollar shorts,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto. Now, “the market’s trying to catch its breath a little bit before it really decides whether or not to extrapolate this trend towards a stronger dollar.” The dollar had weakened on expectations that the Fed will hold rates near zero for years to come even as the economy rebounds from COVID-19 pandemic-related shutdowns. Two regional Federal Reserve officials said on Monday that a faster withdrawal from the central bank’s bond purchase program could give it more leeway in deciding when to raise interest rates. New York Fed President John Williams also said that more progress is needed before the Fed should begin to scale back some of its economic support. Comments by Fed Chair Jerome Powell will be in focus on Tuesday to see if he confirms the hawkish outlook or tries to row back market expectations of faster tightening. Powell said last week there had been initial discussions about when to pull back on the Fed’s $120 billion in monthly bond purchases, a conversation that would be completed in coming months as the economy continues to heal. The dollar index against a basket of currencies fell 0.44% on the day to 91.849. The euro gained 0.41% to $1.1917 and the greenback gained 0.03% to 110.29 Japanese yen. The British pound gained 1.03% to $1.3933. Some analysts say the recent market moves have been exaggerated by investors unwinding crowded trades, and that the dollar still faces weakening pressures as the global economy recovers. “The core thesis underpinning our USD weakness view has not changed drastically,” Wells Fargo analysts said on Monday in a report. “For one, the global economic recovery is still gathering pace and broadening in scope. Moreover, while the Fed’s dots sent a hawkish signal, Chair Powell continued to talk down the risks of a near-term taper. In any case the Fed still looks likely to lag many of its G10 peers in reducing accommodation,” they said. Producer price inflation data on Friday will also be in focus for any signals that price pressures may stay higher for longer, which could prompt sooner-than-expected Fed tightening. “If inflation data comes in a little bit firmer than expected, or is a little bit stickier than expected, then that could portend to more aggressive timelines for the Fed to remove accommodation,” Rai said. In cryptocurrencies, bitcoin’s poor recent run continued with a 8.89% drop to $32,390, as China expanded restrictions on mining to the province of Sichuan. Cryptomining in China accounts for more than half of global bitcoin production. Reporting by Karen Brettell; editing by Jonathan Oatis and Will Dunham Our Standards: The Thomson Reuters Trust Principles.