LONDON, Dec 14: The dollar rose sharply on Friday against the euro after 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.

In late European trade, the euro was at $1.4426, down sharply from $1.4555 in early deals and $1.4627 in New York late on Thursday.

The dollar also rose strongly against the yen, hitting 113.37 yen against 112.15 Thursday.

The latest US price figures compound concerns that the United States 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.

Mitul Kotecha at Calyon believes many are expecting too many rate cuts from the Fed next year and as markets readjust their expectations, the dollar will benefit.

“The dollar looks set to maintain its gains into year-end and we continue to look for the dollar to extend its recovery in 2008 as the extreme bearishness towards the US economy fades,” said Kotecha.

Beyond interest rate speculation, analysts noted that the dollar may also be boosted from US companies repatriating foreign capital in order to make up for tight liquidity conditions.

At the same time, dealers said confirmation that eurozone inflation is also on the rise -- up an annual 3.1pc from the 3.0 per cent previously given for November -- means the European Central Bank will maintain its hard line.

In European trade on Friday, the euro was at 163.60 yen (164.08), 0.7143 pounds (0.7167) and 1.6637 Swiss francs (1.6695).—AFP