SINGAPORE (Reuters) -The dollar was on the defensive at the start of a pivotal week on Monday as Donald Trump returns to the White House, with his inauguration speech later in the day the primary focus for investors hoping to decipher his immediate policies.

The Japanese yen strengthened in Asian hours, clinging to a one-month high hit last week, as traders wager the Bank of Japan will hike its policy interest rate this week. Still, trading is likely to be thin with U.S. markets closed.

Investors are also keeping an eye on Middle East developments after Hamas released three Israeli hostages and Israel released 90 Palestinian prisoners on Sunday, the first day of a ceasefire suspending a 15-month-old war.

Cryptocurrency investors remain in party mode awaiting executive orders from Trump aimed at reducing regulatory roadblocks and promoting widespread adoption of digital assets.

Trump courted crypto campaign cash promising to be a "crypto president" and launched a digital token on Friday, which soared above $70 at one point for a market value north of $15 billion. It was last trading around $42, CoinMarketCap showed.

Bitcoin, the world's best known cryptocurrency, was slightly weaker at $101,434 on Monday. It has surged 80% since the U.S. election in early November touching record high in December.

The spotlight is firmly on the policies Trump will enact on his first day in office. At a rally a day before, Trump said he would impose severe limits on immigration.

Goldman Sachs strategists expect U.S. policy changes to add to the case for dollar strength but cautioned of some near-term risks given the market's expectation for quick action on tariffs.

Instead, Goldman strategists anticipate a series of headline-grabbing news over time on tariffs, similar to Trump's first presidency. "We think the storm is just rolling in. We expect it will pay to be patient."

The dollar index, which measures the U.S. currency against six peers, was 0.16% lower at 109.16 but remained close to the 26-month high of 110.17 touched last week.

The index has risen 4% since the election as traders expect Trump's policies to boost growth but be inflationary, requiring interest rates to stay higher for longer.

The euro advanced 0.26% to $1.029775 but still near a two-year low touched last week as tariff threats weigh. Sterling rose 0.27% to $1.2201.

Thierry Wizman, global foreign exchange and interest rates strategist at Macquarie, said when it comes to tariffs, traders are in a "wait-and-see" mode at best and, at worst, have been largely unwilling to give disinflation in the U.S. the benefit of the doubt.

"That means that any renewed mention of tariffs ... is likely to send the USD higher, as well as (bond) yields."

Last week's slightly cooler core inflation data, dovish comments from Federal Reserve Governor Christopher Waller and reports of tariffs being introduced gradually have led traders to price in the prospect of two interest rate cuts this year.

Markets are now pricing in 42 basis points of easing in 2025. The shifting expectations weighed last week on the dollar which clocked its first week of decline in seven.

The yen was last at 156.18 per dollar, not far from the one-month high of 154.98 touched on Friday, with sources telling Reuters the BOJ was likely to raise its policy interest rate this week barring market shocks when Trump takes office.

Governor Kazuo Ueda and his deputy said last week the central bank will debate whether to hike, signalling an intention to take borrowing costs higher at a Jan. 23-24 policy meeting unless Trump's inaugural speech upends markets.

HSBC's chief Asia economist Fred Neumann said economic data in Japan suggests that monetary policy normalization is certainly warranted this year.

The BOJ should have raised rates in December, said Neumann at HSBC's outlook event in Singapore. "So we think it's now good to do this (hike rates),"