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Dollar gains after inflation data suggest more hawkish Fed

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The U.S. dollar hit a more than two-week high against a basket of major currencies on Friday after U.S. inflation data boosted bets on a faster pace of Federal Reserve interest rate increases, while uncertainty ahead of a Bank of Japan (BOJ) meeting limited the dollar's gains against the yen.

The U.S. Labor Department said its Consumer Price Index rose 0.2 percent last month after being unchanged in July. In the 12 months through August, the CPI increased 1.1 percent, up from 0.8 percent in the year through July. The figures beat expectations of economists polled by Reuters.

Traders' expectations of a rate hike from the Fed at its meeting next week rose slightly to 15 percent from 12 percent on Thursday, according to CME Group's FedWatch program. Expectations for a December Fed rate hike rose to more than 56 percent from just over 47 percent on Thursday.

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While the inflation data was not enough to convince traders that the Fed could raise rates next week, it suggested a greater possibility of a December move from the U.S. central bank and a quicker pace of rate increases next year, analysts said.

"The data is just a reminder that the Fed is behind the curve," said Greg Anderson, global head of FX strategy at BMO Capital Markets in New York. "They may not go before the election, but they've got some catching up to do next year."

The dollar index, which measures the greenback against a basket of six other major currencies, rose 0.83 percent to 96.08. The euro hit a 10-day low against the dollar, while the dollar hit a 10-day high against the Swiss franc.

The dollar was last up 0.31 percent against the at 102.41 yen ahead of the BOJ's Sept. 20-21 policy meeting. The dollar remained within recent ranges against the Japanese currency on uncertainty surrounding whether the BOJ will ramp up its stimulus and whether such a move would significantly weaken the yen.

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The Nikkei newspaper reported this week that the BOJ plans to make its negative interest-rate policy the centerpiece of future monetary easing by promising to weigh further cuts as expansions to asset buying near their limits.

"There is still the uncertainty about what is actually going to happen" at the BOJ meeting, said Alfonso Esparza, senior currency strategist at Oanda in Toronto.