FOREX-Dollar rises on prospect of Fed tightening
* Dollar rises, trades near highs versus euro, yen
* Weak euro zone inflation data adds to rate cut prospects
* US Fed's Plosser reiterates need to slow asset purchases
* U.S. data awaited later; Aussie hits 11-month low
LONDON, May 16 (Reuters) - The dollar was near a six-week high against the euro and a 4-1/2 year peak against the yen on Thursday on expectations of scaled back asset buying in the United States and more monetary easing in the euro zone.
Falling prices in Germany and France highlighted the risk of deflation in the euro zone as the region slips into recession, whcih could increase the risk of more European Central Bank interest rate cuts.
By contrast Federal Reserve policymaker Charles Plosser for the U.S. central bank to start tapering asset purchases from next month.
But analysts said the dollar could pare its gains if U.S. inflation data and a business survey of the mid-Atlantic region due at 1230 and 1400 GMT come in weak, especially after a string of softer data on Wednesday.
Plosser is a known hawk but more Fed officials are due to speak on Thursday and Friday, while Fed Chairman Ben Bernanke speaks at the weekend.
"Data has highlighted weakness in the euro zone economy, including in core countries, and this will leave the euro vulnerable," said Ian Stannard, currency strategist at Morgan Stanley.
At the same time a firmer dollar trend was "very much in place", which could mean the euro drops towards the April 4 low of $1.2740 perhaps as early as next week. "Even if Bernanke dampens some of the pro-tapering enthusiasm it will only cause a temporary setback for the dollar."
The euro was down 0.1 percent at $1.2870, staying near a six-week low of $1.2843 hit on Wednesday when data showed the euro zone contracted for a sixth consecutive quarter.
The dollar rose 0.1 percent against a basket of currencies at 83.878, hovering near the 2012 peak of 84.10. Above this would mark the dollar's highest in nearly three years.
"The only thing driving currencies at the moment is that we are in an environment where stronger U.S. growth is positive for the dollar via the Fed tapering argument," said Adam Cole, global head of FX strategy at RBC.
Against the yen the dollar was up 0.2 percent at 102.51 yen, near a peak of 102.77 yen hit on Wednesday, its strongest since late 2008.
Traders said investors were eager to buy dips in the dollar, which was expected to gain further while the yen continued to weaken following April's aggressive Japanese monetary easing.
Commodity currencies fell sharply, with the Australian dollar falling 1 percent to an 11-month low of $0.9797. The New Zealand dollar hit a six-month low of $0.8140.
RBC's Cole said when the dollar moved higher commodity-linked currencies tended to be the hardest hit because dollar strength often feeds through into commodity price weakness.
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