Dollar adds to gains at end of best week since May

By Michael Connor

NEW YORK (Reuters) - The dollar rose on Friday, ending its best week of gains since May, on strong inflation and housing data that encouraged bets on a U.S. interest rates hike by the end of the year.

U.S. consumer prices rose for a fifth straight month in June, while housing starts jumped last month and building permits surged to an eight-year high, according to separate government reports.

The Federal Reserve has kept its short-term interest rate near zero for more than six years, and most economists believe the Fed will initiate rate hikes in September. Fed Chair Janet Yellen this week said an interest rate increase was likely this year.

The greenback, as tracked by the U.S. dollar index <.DXY> against a basket of currencies, has this week clocked a nearly 2 percent rise, and on Friday was last up 0.20 percent. That was the index's best weekly showing since the week ended May 22.

The euro was off 0.25 percent on Friday to $1.0850 , a level last seen on May 27 and down more than 2 percent on the week as currency investors shifted attention from the Greek crisis to economic fundamentals that favor the United States.

Most traders and strategists reckon the diverging policy outlook between the euro zone and the United States should see the euro continue to weaken, with many betting that it will fall below $1 in the next year.

"The focus is turning to the U.S. rate cycle, and (the market reckons) a September rate hike is still, if not probable, at least possible," RBC Capital Markets global head of FX strategy, Adam Cole, said. "From now the euro goes down primarily because the dollar is going up."

Sterling hit a 7-1/2-year high against the euro of 0.6992 pounds after Bank of England Governor Mark Carney gave his strongest hint yet on the timing of a UK rate rise, saying a decision would come into focus around the end of 2015.

The greenback was down about 0.1 percent on the day against the yen at just under 124 yen after touching a one-month peak of 124.235 yen .

Looking forward, Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington, said, "The dollar’s outperformance, coupled with a slow start to America’s economic calendar next week, could leave it prey to profit-taking."

(Reporting By Michael Connor in New York; Editing by Meredith Mazzilli and Andrew Hay)

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