Dollar May Extend Gain on U.S. Economy, Fed Stimulus Outlook

Dec. 22 (Bloomberg) -- The dollar may extend gains against its major counterparts on speculation the Federal Reserve will withdraw stimulus measures earlier than expected amid signs the U.S. economic recovery is gaining momentum.

The greenback traded near the strongest level in more than a month against the yen and a three-month high against the euro before reports this week forecast to show an increase in U.S. personal spending and home sales. The Swiss franc was near its strongest level since March versus the common European currency, extending its advance past the 1.50 level that analysts had dubbed the central bank’s “line in the sand.”

“With the U.S. economy beginning to see a self-sustained recovery, people now feel there’s increased likelihood for a rate hike,” said Yuji Kameoka, senior economist in Tokyo at the Daiwa Institute of Research Ltd. “The dollar is now entering a rising trend, shifting away from a prolonged downtrend.”

The U.S. currency was at $1.4285 per euro at 8:57 a.m. in Tokyo from $1.4275 in New York yesterday. The dollar was at 91.06 yen from 91.17 yen yesterday when it touched 91.23 yen, the highest level since Nov. 4. The yen was at 130.09 per euro from 130.18.

U.S. personal spending probably rose 0.7 percent in November for a second month, according to the median estimate of economists in a Bloomberg survey before the Commerce Department report due tomorrow. Combined sales of new and existing homes last month may have reached the highest level since May 2007, other figures may show.

Dollar Index

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against currencies including the euro, yen, pound and franc, gained 0.4 percent to 78.116 yesterday, near its three-month high of 78.141 set on Dec. 18.

Futures trading in Chicago indicated a 46 percent chance that the Fed will increase its target rate for overnight lending between banks, currently between zero and 0.25 percent, by at least a quarter-percentage point by the June meeting, up from a 32 percent likelihood a month ago.

The Fed has begun using Treasuries and agency debt in reverse repurchase agreements this month to test a mechanism for unwinding unprecedented monetary stimulus, removing a total of $990 million in cash from the banking system in five operations since Dec. 3.

Before a Dec. 4 payrolls report showed an unexpected drop in the U.S. unemployment rate, the gauge of the greenback had fallen 17 percent from its 2009 peak reached in March as evidence of a global economic rebound spurred investors to buy higher-yielding assets funded with dollars.

Yield Gap

Adding to the dollar’s momentum, a gap of yields on U.S. debt over Japanese bonds reached the widest in more than one year amid signs of rising inflation expectations in the U.S.

The spread between 10-year Treasury yields and the same maturity Japanese government bonds reached 244.5 basis points yesterday, the biggest since Oct. 31, 2008.

“Widening yield gaps are now favoring the dollar,” said Minoru Shioiri, chief manager of foreign-exchange trading at Mitsubishi UFJ Securities Co. in Tokyo.

The Swiss franc may extend its advance for a fifth-straight day against the euro amid growing speculation the Swiss National Bank has relaxed its resistance to gains in the currency. The franc touched 1.4850 yesterday, the strongest level since March 12, when the central bank bought foreign currency to weaken the franc and support the economic recovery.

“It now seems to be appropriate to assume that central banks which seek to withdraw stimulus measures also need to accept the appreciation of their own currency,” Koichi Kurose, chief strategist in Tokyo at Resona Bank Ltd.

The Swiss National Bank began intervening in foreign- exchange markets in March to prevent gains that hampered exports and increased the risks of deflation.

The Swiss currency was at 1.4934 per euro from 1.4938 yesterday when it hit 1.4850, the strongest since March 12.