US dollar gains as inflation data backs Fed rate hike; yen sinks

SINGAPORE, April 28 (Reuters) - The U.S. dollar rose on Friday after data showed inflation grew in March, though at a slower pace, keeping the Federal Reserve still firmly on track to raise interest rates at next week's monetary policy meeting.

The yen, meanwhile, fell across the board, after the Bank of Japan said it would maintain ultra-low interest rates as expected, and unanimously decided to make no changes to its yield curve control (YCC) policy.

The Japanese currency plunged to its lowest since September 2008 against the euro, and its weakest level in seven weeks versus the dollar.

The euro was last up 1.6% against the yen at 150.13 , while the dollar last traded up 1.6% higher at 136.12 yen .

The dollar index, a measure of the greenback's value against six major currencies, rose 0.1% to 101.54 .

Friday's data showed the personal consumption expenditures (PCE) price index edged 0.1% higher in March after rising 0.3% in February. In the 12 months through March, the PCE price index increased 4.2% after climbing 5.1% in February.

Excluding the volatile food and energy components, the PCE price index inched up 0.3% after increasing at the same rate in February. The so-called core PCE price index gained 4.6% on a year-on-year basis in March after rising 4.7% in February. The Fed tracks the PCE price indexes for its 2% inflation target.

"This may throw a monkey wrench into market expectations of a pause in June," Gina Bolvin, president of Bolvin Wealth Management Group, said in emailed comments.

"Guidance will be crucial. If (Fed Chair Jerome) Powell pounds the table on 'more work to do', the market could very well pull back."

Following the inflation data, the rate futures market has priced in a 90% chance of a 25 basis-point hike next week.

"The dollar is benefiting from elevated core inflation, which I think is leading the market to rethink the outlook for rate cuts later this year and I think it sets the stage for the Fed to reiterate that interest rates are likely to remain higher for longer," said Joe Manimbo, senior market analyst at Convera in Washington.

A separate report on Friday showing the final University of Michigan consumer sentiment reading of 63.5 in April, up from a three-month low 62 in March, added to dollar gains. U.S. consumers' one-year inflation outlook was 4.6 this month from 3.6 in March, further underpinned rate hike expectations, boosting the dollar as well.

The euro, meanwhile, slipped 0.2% to $1.1012 .

Economic data painted a mixed picture for growth and inflation across the euro zone, raising uncertainty around the size of the European Central Bank's expected interest rate hike next week.

Preliminary data showed gross domestic product in the euro zone expanded by 0.1% in the first quarter, below expectations in a Reuters poll for 0.2%.

The single European currency had fallen much more earlier in the session, but trimmed losses as investors sold the yen against the euro. That spilled over to the euro/dollar cross.

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Currency bid prices at 11:08AM (1508 GMT)