Dollar waits on CPI, yuan bounces back from policy knock

 The dollar was largely unchanged in early European trade Friday ahead of the release of key U.S. inflation data, which could influence Federal Reserve monetary policy thinking into the new year. The euro , seen as vulnerable to a Federal Reserve hike especially if European rate rises lag, dropped 0.4% on Thursday and was steady in Asia at $1.1297.

The dollar index , at 96.197, was drifting toward its seventh consecutive weekly rise ahead of the data, which is due at 1330 GMT. Annual price gains of 6.8% are expected and any upside surprise will likely be interpreted as a case for a faster Federal Reserve taper and sooner interest rate rises.

Consumer confidence data is also due on Friday and if it holds up could portend even more price pressures ahead.

Tom Porcelli said,"Inflation is going to accelerate." RBC Capital Markets' chief U.S. economist, who thinks the annual pace is going to pick up and keep rising to push near 7% early in the new year.

He said, "As a result, we think that combination means a hike in March is very possible."

"The market is pricing in about a 40% chance of that, but we now think it's a bit higher. It's probably closer to a coin flip now."

The Fed, European Central Bank, Bank of England and Bank of Japan also all meet next week and the combination of the inflation data and the possibility of a central bank response have set market volatility gauges surging .

"Judging by the way the dollar is trading. I'd argue traders are positioning for a higher CPI print which cements a view that the Fed will increase the pace of tapering its QE programme," said Chris Weston, head of research at Pepperstone.