The U.S. dollar extended gains Monday, as government bond yields edged higher, after a reading of the Federal Reserve's preferred inflation gauge cemented interest rate prospects ahead of its two-day meeting in Washington.

U.S. consumer prices, according to the the personal consumption expenditures (PCE) index, jumped to an annual rate of 2% last month, the Commerce Department said, the biggest gain in more than a year and bang-in-line with the Fed's 2% inflation target. The so-called core PCE index, which strips out volatile food and energy costs, accelerated to 1.9% from 1.6% in the previous month. 

The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.36% higher on the session at 91.86 following the release, which benchmark 2-year Treasury note yields, which are more sensitive to changes in interest rate perceptions, gained 2 basis points to 2.488% while 10-year note yields, which are more likely to move on growth projections, eased to 2.96%.

The dollar was also notably stronger against the euro, which drifted 0.35% lower at 1.2086 after data from Germany showed that inflation in Europe's largest economy slowed to 1.4% in April, down from 1.5% in March and well below the European Central Bank's 'just below 2%' consumer price target.

The greenback also gained 0.24% against the pound, which continues to slip following a much softer-than-expected reading of first quarter GDP, which slowed to 0.1% from 0.3% in the first quarter, that has clipped expectations for a near-term interest rate hike from the Bank of England. 

The Fed starts its two-day policy meeting Tuesday in Washington, but investors aren't expecting any changes in the key Fed Funds rate, which currently sits at 1.75%, until the bank's June meeting. By then, investors are pricing in a 93.8% chance of a 25 basis point rate hike, according to the CME Group's FedWatch tool, but that figure has slipped from a previous reading of 95.9% just over a week ago.

The crucial reading for Fed hikes, however, likely rests with the market's expectation of a December rate hike - which would take the 2018 total to four. At present, investors are pricing in a 39.9% chance of a December hike, down from 41.1% at the start of last week.