Dollar having best week in three years ahead of G8

NEW YORK (Reuters) - The dollar headed for its best week in over three years versus a basket of currencies on Friday ahead of this weekend's G8 meeting, helped by U.S. inflation data which raised expectations for higher U.S. interest rates.

The U.S. currency benefited strongly this week as the government and Federal Reserve turned their fire on inflation and its impact on the dollar, raising the prospect of dollar-buying intervention.

The U.S. government report on Friday, which showed soaring gasoline and energy prices driving up U.S. consumer prices during May by the fastest rate since November, only added to the dollar's attractiveness.

Higher rates bolster the attractiveness of dollar-denominated securities and raise demand for the dollars to buy them.

"The headline number supports the recent expectations that the Federal Reserve is going to hike rates," said Ken Landon, global currency strategist, at JP Morgan Chase in New York of the inflation report. "Big picture, this supports a strong dollar."

In early morning New York trade, the euro was down 0.8 percent on the day at $1.5325, having hit a one-month low at $1.5304.

The dollar index jumped 0.6 percent to near four-month high of 74.300, up 2.6 percent on the week and heading for its biggest weekly percentage gain since January 2005 .DXY at current prices. .

The dollar also hit a near-four month high of 108.38 yen before paring gains to trade at 108.13 yen. For the week, the dollar is up 3.5 percent against the yen, poised for its biggest weekly gain in over nine years at current prices.

The Bank of Japan kept interest rates steady at 0.5 percent on Friday, as widely expected.

The euro has lost around five cents against the dollar since Monday as European Central Bank policymakers dampened expectations for a series of rate hikes after flagging a possible rise in July from the current 4 percent.

An already pressured euro slipped to a one-month low after early counting indicated Ireland had voted 'no' in the EU reform referendum.

G8

Dollar momentum could be boosted further if U.S. Treasury Secretary Henry Paulson and other finance ministers attending the Group of Eight finance ministers meeting in Japan issue dollar-supportive comments.

The Group of Eight nations will communicate that high commodity prices are threatening growth and increasing inflationary pressures after their meeting on Saturday, a source from the rich nations club said on Friday.

The euro took an early hit on Friday after French Economy Minister Christine Lagarde said on arriving in Japan that the recent strengthening of the dollar was "satisfying" and that currencies will be discussed, according to media reports.

Japanese Finance Minister Fukushiro Nukaga said he had discussed currencies with U.S. Treasury Secretary Paulson.