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* Core PCE falls 0.1 percent in March
* U.S ISM factory activity reading weakest since December
* Dollar hits one-month high vs yen
* Dollar pares most losses vs euro as data discounted
* Fed meeting eyed this week
By Sam Forgione
NEW YORK, May 1 (Reuters) - The U.S. dollar rose against the yen on Monday after investors shrugged off weak U.S. factory activity and inflation data on the view that it was unlikely to impede a June interest rate increase from the Federal Reserve.
The personal consumption expenditures (PCE) price index excluding food and energy slipped 0.1 percent in March, the first and largest drop since September 2001. In the 12 months through March, the so-called core PCE price index increased 1.6 percent, the smallest gain since last July.
That reading of the core PCE, which is the Fed's preferred inflation measure, fell short of the central bank's 2 percent target.
In addition, the Institute for Supply Management (ISM) said its index of national factory activity dropped to a reading of 54.8 last month, the weakest reading since December.
While the dollar initially fell against the yen and euro after the data, it recovered to hit a one-month high against the yen of 111.92 yen and pared most of its losses against the euro.
"I don’t think this data by itself will derail a June hike," said Vassili Serebriakov, FX strategist at Credit Agricole in New York. "I think markets are kind of treating (first quarter) data as old news" in part since markets had already digested last week's release of first-quarter U.S. gross domestic product growth data, he added.
Trading was thin as several markets across Asia and Europe were closed for the May Day holiday.
The euro was last up just 0.1 percent against the dollar at $1.0901, after touching a session high of $1.0923 shortly after the data. That session peak remained below last week's 5-1/2-month high of $1.0950. The dollar was last 0.2 percent higher against the yen at 111.77 yen and near a one-month high of 111.92 touched earlier in the afternoon.
The Fed would likely label Monday's weak U.S. economic data as "transitory" in the central bank's Wednesday policy statement, said Richard Franulovich, senior currency strategist at Westpac Banking Corp in New York. He said, however, that a continuation of weak U.S. economic data could influence the Fed's economic outlook.
The dollar index, which measures the greenback against a basket of six major rivals, was last up 0.05 percent at 99.101 . (Editing by Bernadette Baum and Dan Grebler)