Dollar Rises As Inflation Pressures Persist; FOMC Meeting In Focus

The dollar firmed on Monday after data showed producer prices in the United States rose more than expected last month, pointing to persistent inflationary pressures and stoking fears the Federal Reserve would need to keep rates higher for longer.

The U.S. producer price index for final demand rose 0.3% in November and 7.4% year-on-year, data released on Friday showed, a slight upside surprise from forecasts of a 0.2% and 7.2% increase, respectively.

Sterling fell 0.27% to $1.22335 in early Asia trade, while the Aussie edged 0.34% lower to $0.6773.

The kiwi slipped 0.37% to $0.6391.

"There were a little bit of concern about how inflation would be persistently high and would encourage the Fed to keep policy at a restrictive level for even longer than previously expected," said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA).

Traders were also kept on edge in the run up to key risk events this week, including a slew of major central bank meetings.

The Federal Reserve once again takes centre stage, and is widely expected to raise rates by 50 basis points, though focus would be on the central bank's updated economic projections and Fed Chair Jerome Powell's press conference.

"If he does talk more about the risks to the economy ... I think that will probably be considered dovish by markets and of course, markets love dovish comments and how the FOMC will pay more attention to downside risks to the economy," said CBA's Kong.

The Bank of England and the European Central Bank (ECB) also meet this week, and are likewise expected to each deliver a 50 bp rate hike.

"ECB officials have been telling us that they care more about the underlying inflation, which has remained elevated," said Kong of the upcoming ECB meeting.

"If they do hike by 50 bps ... they might follow up with some pretty hawkish comments in Lagarde's post meeting conference."

The euro was last 0.1% lower at $1.0520.

Elsewhere, the dollar rose 0.12% against the Japanese yen to 136.73, and against a basket of currencies, the U.S. dollar index eked out a 0.04% gain at 105.09.

The offshore yuan was last marginally higher at 6.9730 per dollar, buoyed by lingering optimism over China's easing of its stringent COVID restrictions.

Ahead of the FOMC meeting, November's U.S. inflation figures are due on Tuesday, with economists expecting core inflation to rise 6.1% year-on-year.

"The market reaction to U.S. inflation surprises has been asymmetric so far in 2022, with downside surprises having a larger effect than upside ones," said analysts at Barclays.

"The inflation print will likely be the bigger driver of the two, (given) the Fed's guidance toward smaller hikes," they added, referring to the U.S. dollar.