By Min Zeng
Dec. 14 (Bloomberg) -- The dollar advanced the most against the euro since August 2004 after the biggest increase in consumer inflation in two years prompted traders to pare expectations for interest-rate reductions.
The dollar gained against 14 of the 16 most-actively traded currencies as futures show the probability of a Federal Reserve rate cut in January declined from 100 percent. The U.S. currency has risen 1.6 percent against the euro over the past five days, the biggest weekly increase since June 2006.
``The fundamental picture started to move in the dollar's favor,'' said Michael Malpede, a senior currency analyst in Chicago at MF Global Ltd., the world's largest broker of exchange-traded futures and options contacts. ``Inflation is picking up, making it difficult for the Fed to aggressively cut interest rates.''
Against the euro, the dollar rose 1.4 percent to $1.4423 at 4 p.m. in New York, from $1.4633 yesterday. It strengthened to 113.41 yen from 112.21. The dollar touched $1.4412 per euro and 113.60 yen, both the strongest levels since November.
The euro fell to 163.57 yen from 164.21. The pound weakened to $2.0169 from $2.0414 yesterday. The Swiss franc declined to 1.1526 per dollar from 1.1412.
Interest-rate futures on the Chicago Board of Trade show traders have reduced bets on Fed rate cuts. The chances the Fed will lower its benchmark rate by a half-percentage point to 3.75 percent in the next three months are 38 percent, from 61 percent a week ago. The odds of a quarter-percentage point cut to 4 percent next month are 76 percent.
The dollar's rally against the euro started in Asian and European trading after it breached a key resistance level at $1.4650, said Toshi Honda, a currency strategist in London at Mizuho Corporate Bank Ltd. A break above a resistance level may lead to new highs, according to technical analysis that uses price charts to forecast currency movements.
``The move approaching $1.50 was too rapid, irrational,'' Honda said. ``It was driven by fear of a U.S. economic meltdown, but I don't think the fear is going to be materialized. The overall sentiment is positive for the dollar.''
He predicted euro-dollar will end the year below $1.40.
The dollar's gain this week pared its loss this year to 8.5 percent against the euro. The Fed's three interest-rate cuts since September have dimmed the allure of U.S. financial assets. The euro rose to a record high of $1.4967 on Nov. 23.
The U.S. currency has lost against the euro every year since 2002, except 2005, prompting Gisele Bundchen, the world's richest model, to insist last month that she be paid in major currencies other than the dollar. In a video for the movie ``American Gangster,'' hip-hop musician Jay-Z flashes a wad of 500-euro notes while driving through New York.
At a time when billionaire investors such as Warren Buffett and Bill Gross want nothing to do with the dollar, a growing number of firms including Deutsche Bank AG, the world's largest currency trader, say the stage is being set for a rally in 2008.
The U.S. currency will reach $1.45 per euro by the end of March and $1.40 by the end of 2008, according to the median forecast of 44 economists in a Bloomberg survey.
The U.S. Dollar Index traded on ICE Futures in New York rose 1.1 percent to 77.425. It earlier touched 77.485, the highest since Oct. 25. The gauge has rebounded from 74.484 on Nov. 23, the weakest since it started trading in 1973. The dollar will strengthen to $1.43 per euro by the end of the month, according to Malpede.
Dollar Versus Yen
The dollar advanced 1.6 percent against the yen this week, posting a third weekly gain, as stronger-than-forecast growth in U.S. retail sales and industrial production allayed concern that credit-market turmoil and a housing slump will curb economic growth.
The yen's decline against the dollar started today after a Bank of Japan survey showed business confidence declined for the first time since March, reducing the case for the central bank to raise borrowing costs from 0.5 percent, the lowest among industrialized nations.
The dollar was helped this week by a coordinated plan led by the Fed to alleviate the credit crunch and the U.S. central bank's third cut in interest rates this year to avert a recession in the world's largest economy.
U.S. consumer prices increased 0.8 percent last month after a 0.3 percent gain in October. The median forecast in a Bloomberg News survey was 0.6 percent. Producer prices rose the fastest in 34 years last month, data showed yesterday.
Krone, Rand, Australia
Currencies in Norway, South Africa, and Australia declined against the yen as rising inflation cut the outlook for global growth, pushing investors to pare holdings of higher-yielding assets funded by loans in Japan. A decrease in oil and gold also reduced the appeal of financial assets in these commodities- exporting nations.
South Africa's rand led declines among the 16 major currencies against the yen, losing 1 percent. Norway's krone and the Australian dollar fell 0.8 percent and 0.6 percent, respectively. Against the dollar, the krone weakened 1.9 percent while the rand dropped 2.1 percent.
The Chinese yuan posted its biggest weekly advance in more than a month as Chinese officials signaled they're willing to allow faster appreciation to cool economic growth.
The yuan rose 0.43 percent this week to 7.3715 per dollar, compared with 7.3692 yesterday and 7.4030 a week ago, according to the China Foreign Exchange Trade System.