Dollar Is Near 2-Month High on Recovery Signs, Fed’s Outlook

Dec. 30 (Bloomberg) -- The dollar traded near a two-month high against the yen on speculation the Federal Reserve will withdraw stimulus measures as the economy recovers.

The dollar may gain against the euro for a third day before a report economists said will show U.S. manufacturing expanded in December for a fifth month, adding to signs the economy is gaining momentum. The yen may extend losses against its major counterparts on prospects Japan’s struggling economy will make the Bank of Japan the last central bank to raise interest rates.

“Ongoing gains in the dollar are based on U.S. economic fundamentals and the Fed’s outlook,” said Daisaku Ueno, president at Gaitame.Com Research Institute Ltd. in Tokyo, a unit of Japan’s largest currency margin company. “It’s not that the Fed will raise rates soon, but it’s preparing tools to reduce an oversupply of dollars toward an exit. The dollar will be bought as long as this view remains intact.”

The dollar bought 91.95 yen at 8:18 a.m. in Tokyo from 92.00 in New York yesterday, when it touched 92.08, the highest level since Oct. 27. The dollar traded at $1.4356 versus the euro from $1.4354. The euro was at 132 yen from 132.05 yen.

The dollar has appreciated 4.5 percent versus the euro this month, trimming its 2009 decline to 2.7 percent. The greenback has fallen 30 percent against the euro this decade.

Recovery Signs

The Institute for Supply Management’s U.S. manufacturing index gained to 54.0 in December from 53.6 in November, according to the median estimate of economists in a Bloomberg News survey before the Tempe, Arizona-based Institute for Supply Management reports the data on Jan. 4. Readings above 50 signal expansion.

Adding to economic recovery signs, the Conference Board’s confidence index increased this month to 52.9 from 50.6 in November, the New York-based research group said yesterday. An S&P/Case-Shiller report showed home prices climbed in October for a fifth month.

Demand for the yen also weakened as the yield premium offered by 10-year Treasury notes over similar-maturity Japanese bonds was 2.49 percentage points yesterday. It reached 2.53 percentage points on Dec. 24, the highest level since December 2007 based on closing prices. The wider the difference, the less appealing Japan’s debt is compared with U.S. securities.

“The dollar continues to be bought back as Treasury yields hold at high levels,” said Toshihiko Sakai, head of trading for foreign exchange and financial products at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. “Outlooks between the Fed and the BOJ are diverging, boosting demand for the dollar-yen.”

Futures trading in Chicago showed a 60 percent chance that the Fed will raise its zero to 0.25 percent target lending rate by at least a quarter-percentage point by its June meeting, up from 48 percent odds a week ago.