Dollar gains vs euro after US CPI data cements rate hike view

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The U.S. dollar rebounded from a roughly six-week low against the euro on Tuesday after data showed inflation pressures rose in the United States in November, cementing expectations for a hike in interest rates by the Federal Reserve on Wednesday.

The euro dipped from a roughly six-week high of $1.10600 hit earlier in the session to a nearly one-week low of $1.09050 after Labor Department data showed that the U.S. core Consumer Price Index rose 2.0 percent in the 12 months through November, marking the largest gain since May 2014.

The data gave traders more confidence that the Fed would hike rates Wednesday for the first time in nearly a decade, a move which is expected to boost the dollar by driving investment flows into the United States.

"Today's U.S. economic reports reinforced the reality that the Federal Reserve is going to raise interest rates tomorrow," Kathy Lien, managing director of FX strategy for BK Asset Management in New York.

Analysts attributed the earlier roughly six-week high in the euro to continued repurchases of the currency, or "short-covering," in the wake of the European Central Bank's smaller-than-expected stimulus move this month and the view that the Fed could indicate Wednesday that it will be slow to raise U.S. rates further after the first hike.

Gains in stock markets worldwide and oil prices also boosted risk appetite, leading the dollar to firm against the safe-haven yen but slip against riskier emerging market currencies. The dollar was last down over 1 percent against the Mexican peso at 17.13 pesos after hitting a record high Monday of 17.47.

The Fed's first rate hike "should provide comfort, and take some skittishness out off the market," and that expectation of greater relief helped boost emerging market currencies, said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York.

The dollar index, which measures the greenback against a basket of six major currencies, was last up 0.62 percent at 98.22. The index rose to a nearly one-week high of 98.292 after hitting a nearly six-week low of 97.190.

The dollar was last up 0.49 percent against the yen at 121.69 yen. The dollar hit a nearly one-week high against the Swiss franc of 0.99255 franc, and was last up 0.61 percent against the franc at 0.99152 franc.