NEW YORK(Reuters) - The U.S. dollar rose on Tuesday as news of a stronger-than-expected pickup in inflation supported the view the Federal Reserve might raise interest rates sooner than some traders had thought.
Weaker price growth has hurt global growth. Earlier this month, the European Central Bank lowered a key rate into negative territory in an effort to avert deflation that could hobble the euro zone economy for years.
U.S. central bankers began a two-day meeting at which analysts expect they will further pare their bond purchase program and show no inclination to hike policy rates until the second half of 2015.
"If the Fed decides to be less dovish, that could give a bid to the dollar," said Sebastien Galy, currency strategist at Societe Generale in New York.
On Tuesday, the government said the U.S. consumer price index, its broadest inflation gauge, rose 0.4 percent in May for its biggest increase in more than year.
The inflation news was mitigated by weaker-than-expected figures on domestic housing starts and lingering concerns about the fighting in Iraq and a gas dispute between Russia and Ukraine, limiting the rise in the dollar, analysts said.
The greenback gained 0.28 percent against the yen at 102.14 yen, while the euro slipped 0.24 percent against the dollar at $1.3540.
The rise in the U.S. currency coincided with a rise in U.S bond yields in the wake of the surprisingly strong CPI report. The yield on two-year Treasuries earlier hit 0.488 percent, its highest since early April.
AUSSIE FALLS, POUND STEADYAmong other currencies, the Australian dollar was set for its biggest drop against the greenback in nearly a month after the minutes from the Reserve Bank of Australia expressed doubts as to whether the RBA had done enough to stimulate the economy.
The Aussie was 0.71 percent lower at $0.9334. Sterling retreated from a five-year high against the dollar after data showed U.K. inflation sagged to a 4-1/2-year low in May. They curbed the pound's surge on expectations the Bank of England could raise interest rates before year-end.
The pound was down 0.17 percent against the dollar at $1.6955 and 0.06 percent lower versus the euro at 79.88 pence respectively.
It rose above $1.70 for the first time since 2009 on Monday following comments from BOE Governor Mark Carney last Thursday the bank might raise rates sooner than expected.Traders said it may take a strong message from BOE minutes from its last policy meeting due Wednesday to lift the sterling back above $1.70.
"This recent inflation data will put a small dent in expectations for a rate hike this year," said Alex Edwards, head of the corporate desk at currency transfer platform UKForex in London.
Additional reporting by Patrick Graham in London; Editing by Mark Trevelyan, James Dalgleish and Chizu Nomiyama