Jan 14 (Reuters) - The dollar index pulled back from Monday’s two-year high, driven by softer Treasury 2-year yields following U.S. producer prices and short-covering of the euro.

U.S. Treasury eased after data showed that producer prices rose at a slower pace than expected in December, with core PPI flat on the month.

U.S. President-elect Donald Trump said he will create a new government agency called the External Revenue Service "to collect tariffs, duties, and all revenue" from foreign sources.

Kansas City Fed President Jeff Schmid said the central bank will respond if policies such as tariffs throw its goals off course.

Negotiators look to hammer out final details of a ceasefire in Gaza.

Firmer European yields and short-covering after a report Trump tariffs may be scaled helped lift the common currency against most G10 peers.

ECB policymaker Robert Holzmann warned against lowering rates too quickly. French Prime Minister Francois Bayrou told parliament the 2025 public deficit target is 5.4% and lowered the growth forecast to 0.9%.

EUR/USD options remained active, mostly fueled by put sellers and adjustments to downside barriers. Recent price action builds case for daily technicals leaning bullish above 1.03 after a hammer on Monday.

The pound fell against the euro as British finance minister Rachel Reeves faced criticism for her management of the economy.

She said that the government will work closely with the Bank of England to ensure the country's economy remains competitive.

Her comments come ahead of Wednesday’s U.K. consumer inflation report for December. A YouGov poll shows Nigel Farage's right-wing Reform UK is Britain's second most popular political party, just one percentage point behind the governing Labour Party.

USD/JPY recaptured 158 with dip buyers emerging near 157.40 after the soft U.S. PPI print. EUR/JPY rose above its 55-day MA at 162.35 as short positions were covered.

Treasury yields were down 0 to 3 basis points as the curve steepened. The 2s-10s curve was up about 2.7 basis points to +42.3bp.

The S&P 500 rose 0.3%, fueled by utilities and financials.

WTI oil prices fell 1.5% after a U.S. government forecast of steady oil demand in 2025.

Gold rose 0.4% as yields eased after U.S. PPI and copper climbed 0.4% on bets China stimulus will drive demand.

Heading toward the close: EUR/USD +0.53%, USD/JPY +0.37%, GBP/USD +0.06%, AUD/USD +0.19%, DXY -0.63%, EUR/JPY +0.88%, GBP/JPY +0.41%, AUD/JPY +0.56%.

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(Editing by Burton Frierson Reporting by Robert Fullem)

((robert.fullem@thomsonreuters.com;))