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US dollar higher as inflation hits Fed's ability to cut rates

The dollar rose sharply on Friday as a larger than expected spike in US inflation suggested the US Federal Reserve may not find it so easy to continue cutting interest rates.

Dealers said the latest figures showed that the Fed, like many central banks, was now caught between keeping rates high to fight inflation and the need to reduce lending costs so as to help ease a global credit crunch.

The euro dropped to US$1.4429 at 2200 GMT from US$1.4627 in New York late on Thursday.

The dollar rose strongly against the Japanese currency, hitting ¥113.23 against ¥112.15 on Thursday.

US consumer prices jumped 0.8 percent last month, the fastest pace in more than two years, and core prices, excluding volatile food and energy costs, rose 0.3 percent.

On a 12-month basis, the overall rise was 4.3 percent, the highest figure since June last year, while core inflation was 2.3 percent, the fastest since April.

`stagflation'

The latest US price figures compound concerns that the US and others could be at risk of "stagflation" -- a combination of slower growth and stubborn inflation pressures -- which puts central banks in a dilemma over whether to cut interest rates or not.

"The sharp rise in inflation globally is a serious threat to asset markets given that we are in an environment of slowing growth," said Hans Redeker at BNP Paribas.

"In fact, it signals that central banks will not be able to cut rates as freely as they might like," Redeker said.

Patrick Fearon at AG Edwards said that the dollar's gains are being fueled by the notion that economies outside the US may slow if the US economy stalls, forcing cuts in rates by other central banks.

bias

"The market is continuing to come around to our view that slowing economic growth will eventually force most of the major foreign central banks to drop their current bias toward further interest-rate hikes and maybe even cut rates," Fearon said.

"This all translates into a new outlook for relative interest rates, in which US rates are seen as unlikely to fall much further, just as foreign rates are likely to start falling in earnest," he said.

"With US rates likely to regain their competitiveness versus foreign rates, the dollar now looks like it will continue to rally in the coming months," Fearon said.

The New Taiwan dollar lost ground against the US dollar on the Taipei Foreign Exchange on Friday, declining NT$0.016 to close at NT$32.376.

A total of US$1.01 billion changed hands during the day's trading.

The NT dollar opened at NT$32.360 and fluctuated between NT$32.333 and NT$32.422.

In late New York trade, the dollar stood at 1.1525 Swiss francs after 1.1418 on Thursday.

The pound was at US$2.0177 from US$2.0408.
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