* Dollar firms on strong U.S. industrial output; housing starts falter * Euro falls to seven-week low against greenback * Pound jumps after December sales surprise * New Zealand dollar falls 1 percent vs dollar By Curtis Skinner NEW YORK, Jan 17 (Reuters) - The dollar rose on Friday, pushing the euro to a seven-week low, after fresh U.S. data supported the view the world's largest economy is improving enough to keep the Federal Reserve's stimulus-reducing measures on track. U.S. industrial output rose at its fastest clip in 3-1/2 years in the fourth quarter, data showed Friday. Housing starts dropped 9.8 percent in December, the largest percentage decline since April, but housing starts were coming off a multi-year high in November. The euro fell to a seven-week low of $1.3515 in the afternoon on the dollar's strong rally. It was last at $1.3530, down 0.7 percent. The dollar index, a gauge of the dollar's value versus six major currencies, rose 0.4 percent to 81.232. In afternoon trading, the yen was keeping pace with the dollar, as the greenback traded down 0.03 percent to 104.31 yen. "Overall, the U.S. economy is making steady, if uneven, progress and that should keep intact expectations for sustained Fed tapering this year," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. "U.S. Treasury yields haven't budged much, so as long as they hold near their elevated levels, that should continue to underpin the dollar." Traders said part of the drop could be technical in nature, as the euro fell below its 100-day moving average of $1.3563. But they also pointed to the pickup in the U.S. economy. "Fundamentally we're more negative on the euro than the U.S. We think the euro should weaken," said Shaun Osborne, chief foreign exchange strategist at TD Securities in Toronto. "There's been some tightness in the funding markets (in the euro zone) over the turn of the year and that's resulted in some upward movement in short-term interest rates. And that's probably being reflected in the exchange rate to a degree," he said. The British pound rose after strong UK retail data was released on Friday. Annual sales volume was up 5.3 percent as of December, the fastest rate of growth since October 2004, the Office of National Statistics data showed on Friday. That bolstered the pound. Sterling was lately up 0.39 percent to $1.6416, off the day's high of $1.6457. Whether the 5.3 percent annual jump points to a sustainable recovery in Britain and more fuel for the pound is unclear. Strong spending around Christmas may well have been chiefly on credit and unless wages start to grow in real terms, the Bank of England may be justified in sticking with ultra-low interest rates well into next year. The New Zealand dollar was pounded on Friday, falling more than 1 percent on the day to $0.8256. The kiwi has been rallying in recent months on expectations that the Reserve Bank of New Zealand was on the verge of raising interest rates. But traders say some hedge funds have taken profit on the kiwi's gains against the Australian dollar this week by buying U.S. dollars. "In our G-10 valuation table it is the New Zealand dollar that now tops the list as the most over-valued currency," Bank of Tokyo-Mitsubishi UFJ analyst Derek Halpenny said. "Given how well priced an RBNZ rate hike is this year, we would not expect strong buying from current levels if the RBNZ does hike this year." The Australian dollar dipped to a three-and-a-half-year low against the greenback by the afternoon on Friday, reaching US$0.8765. It was last down 0.57 percent to $0.8769, according to Reuters data.