On Wednesday, the dollar index (.DXY) barely budged as slightly firmer moves against the euro (EUR=) and yen (JPY=) were offset by losses against the commodity bloc of currencies, such as the Australian and Canadian dollars.
The core rate of inflation increased at 1.7 percent on the year, the fourth consecutive month of deceleration and the slowest overall pace in two years.
On Friday, the Bank of Japan is widely expected to keep its monetary policy unchanged, and reassure markets it will lag the Fed in tapering its massive stimulus programme, as Japan's inflation remains low despite a strengthening economy.
"With financial conditions remaining supportive. and USA financials breaking higher, the Fed may see little reason to moderate its rate hike projections when meeting today", strategists at Morgan Stanley said in a note to clients.
So more likely to raise rates now, without overlay hawkish commentary, and then lay the groundwork for another hike in the autumn if markets don't take fright in the weeks ahead'.
The central bank added that while its main tool for managing monetary policy will remain short-term interest rates, it would be prepared to halt its bond-reductions or even add more assets to its portfolio should there be a "material deterioration in the economic outlook".
Meanwhile, USD/CAD advanced 0.32% to trade at 1.3287, pulling further away from the previous session's more than three-month low of 1.3163.
The New Zealand dollar slipped 0.1 percent to $0.7215 NZD=D4 after touching a low of $0.7197, moving away from the previous session's almost four-month high of $0.7228.
The yield on the two-year Treasury note, which is more sensitive to Fed policy moves, declined 3.6 basis points to 1.319%. Thomson Reuters CRB index tumbled to 14-month lows, having fallen nearly 12 per cent from this year's high hit in January. Prices for US Treasuries rallied, while stocks on Wall Street were little changed.
The Commerce Department reported that retail sales fell 0.3 percent in May due to a steep decline in automobile purchases as well as appliance and electronics sales.
"Clearly officials will be mindful of incoming inflation trends in the coming months before greater confidence can be made with second half of the year policy normalization plans", said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. Wellington and Taipei also saw healthy gains but Shanghai ended off 0.3 percent.
Retail sales rose 3.8 percent in May on a year-on-year basis.
In Canada, data showed that manufacturing sales increased by 1.1% in April, beating expectations for a 0.7% rise, after a revised 0.8% gain the previous month.
According to the CME FedWatch tool, bets that the Fed will hike rates this week are over 95%.