updated 1/19/2007 11:47:14 AM ET 2007-01-19T16:47:14

U.S. consumer sentiment improved more than expected to a three-year high in January, propelled by falling gasoline prices and a favorable view of personal finances and the economy, a survey showed on Friday.

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The preliminary January reading on sentiment by the Reuters/University of Michigan Surveys of Consumers rose to 98.0 from 91.7 at the end of December.

This was the highest since 103.80 in January 2004 and well above the 92.5 median forecast of analysts polled by Reuters.

“Consumers reported more favorable assessments of their personal finances and anticipated a higher rate of economic growth,” said Richard Curtin, director of consumer surveys at the University of Michigan, in a statement.

Stocks pared losses and the dollar rose in reaction to the surprisingly strong consumer data. However, bond prices fell as traders scaled back their expectations of the Federal Reserve trimming official interest rates in the first half of 2007.

“This was a nice upside surprise that continues the run of generally favorable U.S. data that have tempered concerns about the health of the economy. This will further put to rest the notion of an early Fed rate cut,” said Alex Beuzelin, senior market analyst at Ruesch International in Washington, DC.

The surveys’ gauge of current consumer conditions was 112.5 against a final December reading of 108.1, while its measure of consumer expectations was 88.7 versus 81.2.

Consumers, while generally upbeat, remain worried about inflation. The surveys’ one-year inflation index edged up to 3.0 percent from 2.9 in late December, and its five-year index stood at 3.0 percent for a third straight month.

“The decline in gas prices did not relieve concerns among consumers with the otherwise persistently high inflation rate,” Curtin said.

U.S. retail gasoline prices are at an average of $2.23 a gallon, the lowest in five weeks, and could fall near $2 on sinking oil prices, the federal Energy Information Administration said this week.

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