By John McCrank and Saqib Iqbal Ahmed
NEW YORK (Reuters) -The dollar edged higher against the euro on Friday after U.S. producer inflation data for November came in slightly hotter than expected, bolstering the case for continued interest rate hikes by the Federal Reserve even if at a slower pace.
U.S. producer prices (PPI) rose 0.3% last month, data showed, above the 0.2% forecast by economist polled by Reuters.
While the PPI report showed the underlying trend in inflation was moderating, it heightened concerns among market participants that next week's consumer price inflation report, which comes out just before the December Fed interest rate decision, could also surprise on the upside.
"It was a stronger read on prices... that will leave the market cautious on a similar outcome next week," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.
The U.S. central bank is in the midst of the fastest interest rate-hiking cycle since the 1980s as it tries to counter decades-high inflation, but Chair Jerome Powell said last month it could scale back the pace of rate hikes as soon as December.
Against the dollar, the euro was 0.1% lower at $1.05465, though the common currency was still on track for a third straight week of gains.
Sterling rose to a four-day high up 0.3% to $1.2273, as the British government announced reforms designed to maintain London as one of the most competitive financial hubs in the world.
The European Central Bank and the Bank of England will also announce interest rate decisions next week and markets are betting that they, along with the Fed, will slow the pace of their rate hikes, with 0.5 percentage point increases across the board.
Volatility levels for major currencies have retreated towards their long-run average, currency analysts at MUFG said in a note, as markets start to price in the prospect of peak interest rates early next year.
"Part of the decline in volatility we would put down to market pricing indicating most central banks are approaching terminal rates, suggesting Q1 will be the quarter when most central banks will pause after roughly 12 months of tightening," the note said.
Against the Japanese yen, the dollar was 0.2% lower at 136.46 yen.
In cryptocurrencies, bitcoin, which have come under intense selling following the high-profile collapse of crypto exchange FTX, was down 0.5% at $17,142, after hitting a four-day high of $17,353 earlier in the session.