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Dollar up versus yen on inflation data, oil slump

NEW YORK - The dollar rose against the Japanese yen on Monday as oil prices sold off and a gauge of U.S. core inflation closely watched by the Federal Reserve rose more than expected.

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Demand for the U.S. currency versus the euro was capped as traders awaited a host of central bank meetings this week. The Federal Reserve, the Bank of England and the European Central Bank will all issue rate decisions.

Most economists expect both the ECB and the Fed to hold benchmark interest rates steady this week.

Still, some analysts said the stronger-than-expected reading in core U.S. inflation data may support the case for a rate hike by year end. The PCE data for June was released by the Commerce Department in a report which also showed stronger-than-expected consumer spending and personal income for the month.

"The better spending and income numbers continue to suggest signs of stabilization in the U.S. while much of the economies across the pond continue to deteriorate," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.

"The higher-than-expected -increase in core PCE -- the Fed's favorite inflation gauge -- keeps Fed rate hike expectations for the end of the year on the table. It's overall dollar positive," he said.

In midday trading in New York, the dollar was 0.5 percent higher against the yen at 108.20. The dollar also rose against a basket of six currencies and traded last 0.2 percent higher at 73.524.

U.S. crude futures tumbled more than $5 and dropped below $120 a barrel on Monday.

The core U.S. PCE price index rose 0.3 percent in June above economists' consensus forecast for a 0.2 percent rise.

And another report on Monday showed new orders at U.S. factories also increased more than expected in June.

The euro was nearly flat at $1.5567 EUR by midday after trading as high as $1.5631.

Analysts said euro/dollar would stick to narrow trading ranges before the Fed's decision on interest rates on Tuesday and by a following ECB meeting on Thursday.

"Clear signals of rate cuts from central banks, especially the European Central Bank, will be needed before the dollar achieves material upside move," currency strategists at UBS AG said in a note.

While the Fed is expected to stress its ongoing worry about inflation combined with a slowing economy, ECB's President Jean-Claude Trichet's statement may focus on his tightening bias. The ECB raised rates by 25 basis points to 4.25 percent in July.

"(Inflation) is much stronger than expected and will be problematic for the Fed going forward," said Matthew Strauss, a senior currency strategist at RBC Capital Markets in Toronto.

The Reserve Bank of Australia is also going to announce its decision on rates this week. The Aussie dollar AUD hit a three-month low late last week but rose 0.1 percent ahead of Tuesday's RBA announcement.

The Australian central bank benchmark rate is 7.25 percent, and any cut would be the country's first monetary loosening in seven years.

"The U.S. dollar may have more upside versus other G10 currencies, such as the Australian dollar, where the monetary policy outlook is quickly changing in more 'easy' direction," Goldman Sachs said in a note.