(Changes byline, updates prices, adds quotes)
By Simon Falush
LONDON, Dec 17 (Reuters) - The dollar hit a two-month high versus a basket of major currencies on Monday, as strong inflation data at the end of last week continued to bolster sentiment on the U.S. economy in thin year-end trading.
Risk appetite was subdued as major central banks prepared to put into practice measures announced last week to help boost liquidity in cash-strapped money markets.
The U.S. Federal Reserve is due to offer the first $20 billion of 28-day funds through its Term Auction Facility on Monday, with the European Central Bank and the Swiss National Bank also offering cash.
Some investors are sceptical whether the auctions will resolve the credit crunch, and such caution -- coupled with weaker equity markets -- helped boost the low-yielding yen on Monday to the detriment of high-yielders such as the New Zealand dollar.
"Risk aversion is driving the markets which is why the yen is holding up versus the dollar while other currencies are falling," said Niels From, currency strategist at Dresdner Kleinwort in Frankfurt.
He said moves by the banks to inject liquidity into markets would be a short-term positive as a large number of dollars were being injected at a time of thin trading.
By 1123 GMT, the dollar was down 0.1 percent at 113.27 yen <JPY=>, while the euro had fallen 0.5 percent to 162.61 yen <EURJPY=>.
The Australian dollar fell to its lowest in nearly three months versus the U.S. currency <AUD=>, while the New Zealand dollar was down 1.2 percent on the day <NZD=>.
SCEPTICISM OVER MEASURES
Since the joint operations were announced last week, one- and three-month interbank lending rates for dollars, euros and pounds LIBOR have come down slightly but remain well above overnight rate targets.
However some analysts are sceptical about the extent to which the move will help restore confidence in the longer term.
"The issue, as we see it, is that providing banks with extra liquidity helps the banks out of their immediate liquidity bind, but it does not necessarily encourage banks to lend to each other," said ING in a note to clients.
"The sense of mistrust between banks is still high, and fuelled with regular dollops of bad news from the financial sector."
The dollar set a two-month high versus a basket .DXY. The euro fell a 1-1/2 month low of $1.4332 <EUR=>, while sterling -- weighed down by more weak UK housing data -- set a 2-1/2 month trough of $2.0103 <GBP=>.
The higher than expected U.S. inflation numbers on Friday slightly dimmed expectations for further Fed rate cuts, which was seen as dollar-positive but which hit equity markets resulting in higher risk aversion.
However analysts said year-end trading conditions, rather than economic fundamentals, are driving currency moves for now and that the longer term outlook for the dollar is not so positive.
"There were high (U.S.) inflation numbers last week but there is likely to be more bad housing and consumer sentiment data later this week indicating that the risk of stagflation is rising... There will be a renewed focus on fundamentals in the new year," said Dresdner Kleinwort's From.
The Fed cut overnight rates last Tuesday by a quarter-point to 4.25 percent and has slashed them a full percentage point since September, but investors are now less sure if another policy easing is coming as soon as next month.
Markets are now pricing in an around 80 percent chance of a move in January, from nearly 100 percent before the CPI.
Monday sees the release of U.S. capital flows data for October, with the world's biggest economy seen attracting a net $40 billion worth of long-term investments. (Editing by David Christian-Edwards)