Dollar index gains ahead of inflation data, US Fed rate decision this week

The dollar inched higher on Monday, trading in a narrow range as investors remained cautious ahead of several key policy decisions due this week, with the Federal Reserve expected to keep rates on hold for the first time since January 2022.

Monetary policy meetings at the Fed, the European Central Bank (ECB) and the Bank of Japan (BOJ) will set this week's tone as markets seek clues from policymakers on the future path of interest rates.

US May inflation data is also out on Tuesday as the Fed kicks off its two-day meeting.

"Though it's more likely than not that the Fed will 'skip' a hike this month, it seems as if no one wants to be caught on the wrong side of the market should they choose to hike this month, keeping volatility low across most majors," said Helen Given, FX trader at Monex USA in Washington.

She said everyone seemed to be "holding their breath" and waiting for cues from Fed Chair Jerome Powell.

"A hike Wednesday would likely be very dollar-positive as it would go against current market expectations," Given said.

Money markets are leaning toward a pause from the Fed, according to Refinitiv's FedWatch, but a majority expect a hike in the July meeting.

Conversely, a clear majority of economists polled by Reuters expect the ECB to hike its key rate by 25 basis points on Thursday and again in July, before pausing for the rest of the year as inflation remains sticky.

The U.S. dollar index clocked a loss of nearly 0.5% last week, its worst weekly drop since mid-April, and was last up 0.1% at 103.60.

The euro was up slightly at $1.0760, having risen 0.4% last week, its first weekly gain in roughly a month.

Elsewhere, the Japanese yen slipped 0.2% to 139.55 per U.S. dollar, before a two-day meeting by the BOJ, which is expected to maintain its ultra-loose monetary policy and forecast a moderate economic recovery, as robust corporate and household spending cushion the blow from slowing overseas demand, sources told Reuters. The BOJ announces its policy decision on Friday.

Elsewhere, the Reserve Bank of New Zealand last month signaled it was done tightening after raising rates to the highest in more than 14 years at 5.5%, ending its most aggressive hiking cycle since 1999. That sent the New Zealand dollar tumbling 2.7% in May.

The kiwi was last down 0.1% at US$0.6124, sterling fell 0.6% against the dollar to $1.2510, while the Aussie edged up to US$0.6750 with a holiday in most of Australia making for thinned trade.

China's offshore yuan extended losses to trade at its lowest level against the greenback since November as recent soft data has raised expectations for monetary easing from the People's Bank of China this year. The dollar was last up 0.2% at 7.158.