FOREX-Dollar rises sharply on consumer inflation data

(Updates prices, adds comments, changes byline)

By Kevin Plumberg

NEW YORK, Dec 14 (Reuters) - The dollar rose on Friday, posting its largest daily increase against the euro in more than three years, after strong U.S. consumer price data trimmed expectations of aggressive rate cuts from the Federal Reserve.

The dollar rallied against a group of major currencies for the third consecutive week, bolstered by a string of economic reports showing higher-than-expected growth in consumer spending and prices. The data eased some expectations that the credit crisis would drag the U.S. economy into a recession.

The Consumer Price Index for November rose at its fastest pace in more than two years, which may limit the Fed's willingness to ease rates and, in turn, preserve the return on dollar-denominated assets. For details, see [ID:nN14305067].

"More evidence of rising U.S. inflation underlines the Federal Reserve's policy bind and raises chances the central bank will stick to non-interest rate easing liquidity solutions for the struggling money market," said Ashraf Laidi, chief currency analyst at CMC Markets USA in New York.

That should "spare the U.S. currency from interest rate cuts and help it from a relative yield perspective," he added.

By mid afternoon, the euro fell 1.5 percent to $1.4412 <EUR=> against the dollar, the lowest since late October, according to Reuters data. The single currency is on track to post its largest daily fall since June 2004.

"We think this can go for another couple of cents, with the euro probably headed initially to $1.4360 or so and maybe as far as $1.40," said Marc Chandler, global head of FX strategy at Brown Brothers Harriman in New York.