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Dollar Rises as Markets Shift Focus to Inflation

The dollar rose on Monday, rebounding from a 2-1/2 week low against the euro as equities rallied and an economic forecasting gauge showed the U.S. economy, while weak, has so far managed to avoid recession.

That eased fear about sagging consumer confidence and reassured investors that the Federal Reserve will have room to hike interest rates this year should record high oil prices put upward pressure on inflation.

The euro fell to $1.5508, down 0.4 percent from late Friday, after hitting a 2-1/2 week high of $1.5632 earlier in the global session.

The dollar also rose 0.6 percent to 104.60 yen and 0.7 percent to 1.0552 Swiss francs, boosted partly by a 0.1 percent rise in the Conference Board's Leading Economic Indicators index. Analysts said the data showed a weak U.S. economy but one that has sidestepped a recession.

"The dollar's sell-off on Friday was a bit overdone, and now there's a growing view that the Fed's minutes this week will drive home the point that it is done cutting rates," said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington. "The concern among central bankers now is that inflation is starting to rear its head."

After cutting its benchmark interest rate to 2 percent in April, the Fed hinted that it may pause an easing campaign that began in September, when the rate stood at 5.25 percent.

Minutes from that April meeting are due on Wednesday, and investors will look for additional confirmation that the Fed has finally moved to the sidelines.

That's reassuring news for dollar bulls, on edge about oil prices that have surged to a record above $127 a barrel. On Friday, the May Reuters/University of Michigan index of U.S. consumer confidence fell to its lowest level since mid-1980, while short-term inflation expectations hit a quarter-century high.

"What scares people right now is the continued rise in oil prices. Their dollar bullishness is being pared back by the rise in oil prices, as they see OPEC getting more money and putting less into U.S. Treasuries," said Marc Chandler, senior currency strategist at Brown Brothers Harriman in New York.

Elsewhere, the dollar was down 0.6 percent against its Canadian counterpart at C$0.9920, while the Australian dollar scaled a 24-year peak of $0.9564, boosted by firm commodity prices, before easing to $0.9533.

Analysts said inflation worries would keep the market focused on U.S. producer price data due on Tuesday.

However, robust readings from the German ZEW and Ifo sentiment indexes due this week could boost the euro by reinforcing the case for the European Central Bank to leave rates on hold a while longer rather than cutting them.

Oil has contributed to uncomfortably high euro-zone inflation as well. In an interview with BBC on Monday, ECB President Jean-Claude Trichet reiterated that containing inflation needs to be policy makers' top priority.

Euro zone rates stand at 4 percent, and most analysts expect the ECB to hold them there to fend off inflation.

The Bank of Japan is widely expected to keep interest rates at 0.50 percent at a two-day policy meeting that starts on Monday.

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