NEW YORK/LONDON - The dollar rebounded from a three-week low in choppy trading on Friday, as a round of U.S. economic data suggested that inflation continued its red-hot rise in June, keeping the Federal Reserve on track to raise interest rates as aggressively as it deems necessary.

The yen fell from six-week peaks against the dollar as investors digested Friday's data, which showed U.S. inflation perked up in June.

The personal consumption expenditures (PCE) price index jumped 1.0% last month, the largest increase since September 2005 and followed a 0.6% gain in May. In the 12 months through June, the PCE price index advanced 6.8%, the biggest gain since January 1982. The PCE price index rose 6.3% year-on-year in May. Excluding the volatile food and energy components, the PCE price index shot up 0.6% after climbing 0.3% in May.

"The buck seems to be improved somewhat over peers because the PCE does indeed indicate that inflation has not necessarily cooled for personal items, thus giving the Fed enough room to hike as they have been telegraphing," said Juan Perez, director of trading at Monex USA in Washington.

Another key indicator, the U.S. employment cost index (ECI), also increased. The ECI, the broadest measure of labor costs, rose 1.3% last quarter after accelerating 1.4% in the January-March period, the Labor Department said on Friday. The index is widely viewed as one of the better gauges of labor market slack and a predictor of core inflation, as it adjusts for composition and job-quality changes. It is being closely tracked for signs of whether wage growth has peaked.

Action Economics, in its blog after the U.S. data, said the ECI was one of the metrics that alarmed the Fed and caused its pivot to a 75 basis points hike. Friday's reports somewhat negated data on the contraction in U.S. gross domestic product for the second quarter released the day before, which caused a pullback in rate hike expectations.

Post-data on Friday, rates futures markets have priced in a 62% chance of a 50 basis points rate hike at the Fed's September policy meeting, down from about 70% probability before the U.S. economic reports.

 The rates markets also predict that the fed funds rate will peak in February 2023. Before the day, futures were betting that top in the fed funds rate would hit this December.

In morning trading, the dollar index, a measure of its value against six major currencies, rose 0.4% to 106.60. Earlier, it slid to a three-week trough of 105.53 The euro fell 0.4% versus the dollar to $1.0155. Against the yen, the dollar was last up 0.1% at 134.38 yen.

The yen was the primary short bet of the widening interest rate differential trade between the United States and its global peers, with net shorts on the currency, despite a recent pullback, above historical averages at $5.4 billion.

(Reporting by Saikat Chatterjee in London and Gertrude Chavez-Dreyfuss in New York; Editing by Robert Birsel, Toby Chopra and Jonathan Oatis)