Dollar gains as inflation pressures persist; eyes on central bank meetings

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By Rae Wee

SINGAPORE (Reuters) - The dollar climbed on Monday after data on Friday showed U.S. producer prices had risen more than expected last month, pointing to persistent inflationary pressures and a chance the Federal Reserve would keep interest rates higher for longer.

The dollar rose 0.35% against the Japanese yen to 137.05. Against a basket of currencies, the U.S. dollar index eked out a 0.12% gain at 105.18.

The euro was last 0.2% lower at $1.0509.

Sterling fell 0.31% to $1.2229 in Asia trade on Monday, while the Aussie edged 0.34% lower to $0.6773.

The kiwi similarly slipped 0.34% to $0.6393.

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

"There were a little bit of concerns 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 (OTC:CMWAY) (CBA).

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

The Federal Reserve once again takes centre stage, and is widely expected to raise interest rates by 50 basis points, though focus will 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) will also meet this week, and each is likewise expected to 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."

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

"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 (LON:BARC).

"The inflation print will likely be the bigger driver of the two, (given) the Fed's guidance toward smaller hikes," they added, referring to influences on the U.S. dollar.The offshore yuan eased slightly to 6.9798 per dollar, further pressured by worries over a potential spike in COVID cases as China eases its stringent COVID-19 restrictions.