Dollar Rises Most Versus Yen in Two Months on Rate Outlook

Oct. 9 (Bloomberg) -- The dollar advanced the most against the yen since August on speculation the Bank of Japan will trail other central banks in increasing interest rates as the global recession comes to an end.

The six-currency Dollar Index recovered from a 14-month low after Federal Reserve Chairman Ben S. Bernanke said yesterday policy makers are ready to raise borrowing costs once the economy improves. Canada’s dollar was the biggest gainer versus the U.S. currency among major counterparts as employers added more jobs in September than economists forecast.

The Fed “could, shockingly, go early,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “If they do, that’s great news for the dollar. The Fed’s been unfairly criticized as a source of dollar weakness.”

The U.S. currency climbed as much as 1.7 percent to 89.89 yen, the biggest advance since Aug. 7, before trading at 89.82 at 4:04 p.m. in New York, compared with 88.39 yesterday. The dollar strengthened 0.6 percent to $1.4712 per euro, from $1.4794, paring a decline for the week to 0.9 percent. The euro increased 1.1 percent to 132.14 yen, from 130.76.

The dollar remained higher versus the yen after the Commerce Department said the U.S. trade deficit unexpectedly narrowed in August as exports climbed to the highest level of the year and oil imports plunged. The gap fell 3.6 percent to $30.7 billion from a revised $31.9 billion in July.

Canadian Dollar

The Canadian dollar appreciated as much as 1 percent to C$1.0411 per U.S. dollar, the strongest level since September 2008, as employers added 30,600 jobs in September and the unemployment rate dropped to 8.4 percent. The median forecast of 23 economists in a Bloomberg survey was for a gain of 5,000 jobs and a jobless rate of 8.8 percent.

“The market wanted a strong number to pound the U.S. dollar lower,” said David Watt, senior currency strategist at RBC Capital in Toronto. “It got it.”

The Canadian dollar gained 16 percent this year against its U.S. counterpart as the prospects for a recovery from the worst global financial crisis since the Great Depression sparked demand for commodities. Canada draws more than half its export revenue from raw materials.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against the yen, euro, Swiss franc, pound, Swedish krona and Canadian dollar, rose 0.7 percent to 76.528. It touched 75.767 yesterday, the lowest since August 2008.

“We’re starting to move from a regime where it’s been all about risk aversion to a more differentiated regime based on those expectations for rate hikes in other currencies,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York.

Bernanke’s View

The central bank will be prepared to tighten monetary policy when the outlook for the economy “has improved sufficiently,” Bernanke said at a Board of Governors conference in Washington yesterday.

The Fed has probably “learned its lesson” from keeping interest rates low for too long in 2003 and 2004, said Westpac’s Franulovich.

Yields on two-year Treasuries, more sensitive to changes in interest-rate expectations than longer-maturity securities, rose as much as 10 basis points, or 0.10 percentage point, to 0.98 percent, the biggest intraday increase since an 11 basis point gain on Sept. 23.

White House economic adviser Lawrence Summers repeated the administration’s commitment to a strong dollar, citing recent comments by U.S. Treasury Secretary Timothy Geithner.

‘Strong Fundamentals’

“He made it very clear that our commitment is to a strong dollar based on strong fundamentals,” Summers said yesterday at a forum in New York organized by Bloomberg LP, the parent of Bloomberg News. “Any idea that nations can devalue their way to prosperity is one that economic experience very much belies.”

The krone advanced as much as 0.3 percent to 5.6174 versus the dollar, the strongest level since September 2008, as Norway’s inflation rate rose last month, adding to speculation that the central bank may start raising interest rates as early as next month. The underlying inflation rate, excluding energy costs and taxes, increased to 2.4 percent, compared with Norges Bank’s 2.5 percent target. The krone later depreciated 0.3 percent to 5.6524.

The yen dropped against the dollar as Japan’s machinery orders rose 0.5 percent in August, less than forecast, after falling 9.3 percent in the previous month, the Cabinet Office reported in Tokyo. The median estimate of 27 economists in a Bloomberg survey called for a 2.1 percent gain.

‘Momentum’ Fades

Japan’s currency is likely to weaken over the next 12 months as “momentum” fades from a tax break on overseas earnings, according to Brown Brothers Harriman & Co. Since April 1, Japanese exporters have been able to bring back income earned outside the country without paying the combined 40 percent tax.

“It’s largely momentum trading right now, and we’re pushing it because we haven’t reached a pain threshold of anything to stop us,” said Marc Chandler, global head of currency strategy at Brown Brothers in New York. “The reason the Japanese stock market underperforms despite having a strong yen is precisely because they have a strong yen. It’s eroding corporate profits.”

Japan’s currency will probably slip to a range of 105 to 110 versus the dollar in the next 12 months, Chandler said. The yen rose 3.8 percent versus the dollar in September.