FOREX-Dollar falls versus peers after smaller-than-expected rise in US inflation

(Updates prices throughout, adds fresh analyst quote)

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US inflation data increase less than expected

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Trump says next Fed chair to favour lower rates 'by a lot'

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BoE cuts rates in tight 5-4 vote

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ECB holds rates steady

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Markets look for catalysts from key central bank decisions

By Chibuike Oguh and Samuel Indyk

NEW YORK/LONDON, Dec 18 (Reuters) - The dollar lost ground against its major counterparts on Thursday after data showed a lower-than-expected rise in U.S. inflation, while sterling turned higher as a deeply divided Bank of England cut rates. The U.S. Consumer Price Index rose 2.7% year-on-year in November, according to Labor Department data, compared with a 3.1% increase forecast by economists polled by Reuters.

The dollar weakened 0.12% to 155.48 against the Japanese yen and was down 0.16% to 0.794 against the Swiss franc .

"The margin of error shouldn't be this great and it is questionable whether what we got in this release is going to make its way into the more traditional data collection discussion," said Marvin Loh, senior global market strategist at State Street in Boston.

"One of the things that ends up being a challenge in terms of changing expectations significantly is that we're already pricing in a Fed that gets to neutral within the next 12 months. So you either need to aggressively push against the neutral and/or start believing that there's a recession that will make you go below neutral and I don't think we're anywhere near there," Loh said.

The longest federal government shutdown in U.S. history had impacted data collection for the inflation report. The Federal Reserve tracks the Personal Consumption Expenditures Price Index for its 2% inflation target.

President Donald Trump said on Wednesday the next Fed chair will be someone who believes in lower interest rates "by a lot". All of the known candidates - White House economic adviser Kevin Hassett, former Fed Governor Kevin Warsh and current Fed Governor Chris Waller - advocate for interest rates to be lower than they are now.

CENTRAL BANK MOVES The euro was flat in choppy trading after the European Central Bank kept its policy rates steady and took a more positive view on a euro zone economy that has shown resilience to global trade shocks.

The euro was last down 0.01% at $1.173925 against the dollar.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was down 0.04% to 98.329.

Sterling rose after the BoE delivered its fourth rate cut this year, although markets pushed back their expectations for further easing, with the next cut not fully priced until June, from April prior to the decision.

Sterling strengthened 0.29% to $1.3414. "Interest rate markets have reduced their bets on further easing, likely on account of both the finely balanced nature of upcoming decisions and the Governor's comment that room for further reductions is becoming more limited. Two-year sterling swap rates are roughly five basis points higher," said Tom Priscott, FX trader at Investec.

"The pound may have further room for upside as traders recalibrate their outlooks for 2026 through the afternoon," Priscott said.

The Swedish and Norwegian central banks both kept their main interest rates on hold, in line with expectations. The Swedish crown was little changed at 10.9074 per euro, while Norway's crown was down 0.33% at 11.9313 per euro. The Bank of Japan looks almost certain to raise short-term interest rates on Friday to 0.75% from 0.5% as high food costs keep inflation above the central bank's 2% target.

(Reporting by Chibuike Oguh in New York and Samuel Indyk in London, Editing by Kirsten Donovan and Ed Osmond)