Dec. 24 (Bloomberg) -- The dollar posted its biggest weekly gain against the euro since the beginning of November as government reports reinforced expectations the Federal Reserve will raise interest rates at least two more times.

``I like the dollar higher,'' said Jeff Gladstein, global head of foreign-exchange trading at AIG Financial Products Corp. in Wilton, Connecticut. ``There's relatively sub-par growth out of Europe, and the U.S. is humming along.''

The dollar had its biggest jump against the euro in five months on Dec. 20 as the Commerce Department said housing starts surged last month. A measure of inflation the Fed uses for forecasts was revised higher this week. The dollar is set for the first gain since 2001 versus the euro and yen as the gap between U.S. borrowing costs and Japan and Europe widened.

For the week, the dollar rose 1.3 percent to $1.1865 against the euro at 5 p.m. in New York, according to electronic foreign-exchange dealing system EBS. It was the biggest gain since the period ended Nov. 4. The U.S. currency climbed 0.5 percent against the yen to 116.25. It is up more than 13 percent against each currency this year.

Builders broke ground on 2.123 million homes at an annual pace, up 5.3 percent from October, the most in seven months, the Commerce Department said. The agency also said the U.S. economy grew at a 4.1 percent annual rate in the third quarter. It has expanded by more than 3 percent for 10 straight quarters, the longest run since the 13 quarters ending March 1986.

``The data continues to be better than expected,'' said Alan Kabbani, senior currency trader at Wachovia Corp. in Charlotte, North Carolina. ``The better data means the interest- rate spread is going to continue to favor the U.S. dollar.''

Inflation Measure

The Fed has signaled it's unlikely to stop lifting borrowing costs until the housing market cools. ``Housing and energy prices continue to be the focus of our attention,'' Fed Governor Mark Olson said on Dec. 5.

The Commerce Department said on Dec. 21 that the personal consumption expenditures index, excluding food and energy, was revised higher to 1.4 percent from the previously reported 1.2 percent in the third quarter. The index was unchanged at 0.1 percent in November from a month prior, a Dec. 22 report showed.

The Fed has raised the benchmark 13 times since June 2004, to 4.25 percent from 1 percent, to keep inflation in check. The European Central Bank has raised rates once, to 2.25 percent, and the Bank of Japan has kept rates near zero since 2001.

Interest-rate futures show there's a 90 percent chance the Fed will lift its benchmark to 4.50 percent in January. The odds the Fed will raise it another quarter-point to 4.75 percent in March rose to 58 percent yesterday from 52 percent a week prior.

`Recovery Path'

The yen's losses this week may have been limited by speculation the Bank of Japan will end its policy of pumping cash into the economy, a precursor to raising rates, said Sharada Selvanathan, a currency strategist in Singapore at BNP Paribas SA.

``The equity market is doing well and the Japanese economy is on a solid recovery path,'' she said. ``Reducing money supply is yen supportive.'' The yen may rise to 105 against the dollar by the end of 2006, Selvanathan said. The Nikkei-225 Stock Average is up 38.7 percent this year.

The yen has gained about 3 percent against the dollar this month as traders have unwound so-called carry trades, where they had sold low-yielding currencies for higher-yielding ones such as the U.S. dollar.

The euro was weaker even as reports on Dec. 22 showed Italian business confidence gained to a three-year high in December and Belgian business confidence reached its highest level in 14 months.

Trichet Comments

ECB President Jean-Claude Trichet, in remarks in Der Spiegel magazine published two days ago, said policy makers may raise rates to contain inflation. The European Commission said Dec. 20 the economy of the dozen nations sharing the euro will grow about 0.6 percent this quarter.

The yield 10-year U.S. Treasury notes offer over like-dated German government bonds has increased this year to 1.05 percentage points from 0.53 percentage point at the start of 2005. Over five years that gap has averaged 0.19 point.

``We expect the upward trajectory for the dollar to continue into next year,'' wrote Benjamin Pedley, an investment strategist at LGT Bank in Singapore, in a note to clients yesterday. ``The main factor underpinning the dollar into 2006 will continue to be interest-rate differentials.''

Trading tapered off through the week before the Christmas weekend and with a holiday in Japan yesterday, said Greg Gibbs, senior currency strategist at RBC Capital Markets in Sydney. A three-day mass transit strike in New York City also left some firms short-staffed.

``The trading volume must be around a 10th of what's usual,'' he said yesterday.

To contact the reporter on this story: Michael McDonald in New York at mmcdonald10@bloomberg.net ; Rodrigo Davies in London at rdavies13@bloomberg.net .