* Dollar index on track for best weekly rise of 2017
* Dollar flat in choppy trading after mixed U.S. data (Updates to U.S. market open, adds data, quotes, changes dateline, previous LONDON)
By Dion Rabouin
NEW YORK, Sept 29 (Reuters) - The dollar was little changed on Friday after conflicting U.S. economic data, leaving it on course for its largest weekly rise this year as an increase in expectations for inflation and interest rate hikes from the Federal Reserve boosted the currency.
The dollar fell to session lows after the release of a report saying that U.S. consumer spending barely rose in August, but that was offset by an unexpected increase in purchasing managers’ index and an in-line reading on consumer sentiment.
Fed Chair Janet Yellen said earlier this week that the central bank planned to stay on its current rate-hike path, which indicated to investors an increase in U.S. overnight interest rates in December, the third this year, and the likelihood of further hikes in 2018.
Analysts said the week’s rally was sparked by German elections last weekend in which the far-right Alternative for Germany won seats in parliament for the first time, leading to worries that anti-European political movements on the continent, including those in Spain and Italy, could be more worrisome than initially thought.
“Economically the situation in the U.S. merits the fact that the dollar has gained,” said Juan Perez, currency strategist at Tempus Inc in Washington.
“The political dissolution in Europe continues and now with the situation in Spain it symbolizes that there are separatist movements across the continent that cannot be ignored. On a geopolitical perspective, Europe in a little bit tougher situation than we are.”
The release of the foundation of President Donald Trump’s tax-reform proposal also pushed inflation expectations higher, with U.S. Treasury yields rising to months- and years-long highs on Wednesday.
While the broader market remained skeptical about Trump’s ability to push his tax plan through Congress, some see the dollar as primed for more gains in the short term after breaking out of established ranges.
“What you have seen is a general closing out of some short dollar positions but for that to be sustained we need greater detail on Trump’s fiscal plans and see it going through,” said James Binny, head of currency portfolio management for EMEA at State Street Global Advisors, which manages $2.61 trillion in assets.
The dollar index, a trade-weighted basket of the greenback against its rivals, was flat at 93.05.
It has gained more than 1 percent this week, putting it on track for its best weekly performance since December.
The euro was up 0.35 percent at $1.1824, having earlier hit a three-day high against the dollar. The dollar was 0.2 percent higher against the Japanese yen at 112.56 yen. (Reporting by Dion Rabouin)