NEW YORK, Dec 10: The dollar rose on Friday as strong US economic data gave a fundamental underpinning to a technical rally built on traders' desire to tap into profits after riding months of euro gains against the US currency.

Concerns over growing US budget and trade deficits have taken a heavy toll on the dollar, but analysts said the US currency was now finding support from the relative US growth advantage and the prospect of higher US interest rates.

As the dollar rose, the euro fell three-quarters of a per cent to $1.3218, well below the record high of $1.3470 it hit earlier this week. A bigger-than-expected rise in consumer sentiment in early December suggested that consumers were reasonably happy about the economy ahead of the holiday season.

"To the extent that the sentiment index was up and better than expected, (the data) is constructive with the dollar already moving higher and has the opportunity to at least help that bias at the margins," said Bob Lynch, currency strategist at BNP Paribas in New York.

"But it (the dollar's rally) is still position-adjustment, partly due to year end but also as a reaction to the big rise in the euro since October," he said. The University of Michigan preliminary December consumer sentiment index rose to 95.7 from 92.8 in November. Economists had expected a reading of 93.5.

Government data showed producer prices rose 0.5 per cent in November, more than economists had forecast, after a 1.7 per cent gain in October. Excluding food and energy, producer prices rose 0.2 per cent in November after a 0.3 per cent increase in October.

A year-over-year increase in producer prices of 5.0pcwas the largest rise since December 1990. The Federal Reserve is widely expected to raise US interest rates by 25 basis points to 2.25 percent next week. Such a move would lift official US rates above euro zone rates for the first time in more than three years.

Sterling was down 0.7 per cent to $1.9139, while the dollar rose nearly 1 per cent versus the Swiss franc to 1.1606 francs. The yen was particularly badly hit as investors digested data this week showing Japan's economy barely grew in the third quarter, and other reports showing an unexpected fall in core machinery orders - a key measure of business investment.

The dollar jumped 1.5 per cent to a one-month high above 106 yen before paring gains to 105.54 yen, a gain of nearly 1 per cent in the session. The dollar also gained sharply against high-yielding currencies as investors reassessed the likelihood of further interest rate hikes in these regions.

Central banks in Canada, Britain, New Zealand, Australia and Sweden have all kept interest rates on hold this week, with some citing concerns about foreign exchange rates. The dollar rose 0.5 per cent against the Canadian dollar to C$1.2271. The Australian dollar fell 0.7 per cent to $0.7495.

One factor weighing on the US dollar in recent months has been speculation global central banks may be looking to diversify reserves away from the falling US currency. However, China's foreign exchange regulator said on Friday the country had not reduced its holdings of dollar assets and would not adjust the composition of its reserves based on short-term market moves. -Reuters