Dollar Trades Near Two-Month High Versus Euro on Rate Outlook

Dec. 16 (Bloomberg) -- The dollar traded near a two-month high against the euro amid prospects the Federal Reserve will withdraw stimulus measures amid signs the U.S. economic recovery is gaining momentum.

The greenback was near a one-week high against the yen before reports forecast to show U.S. housing starts rebounded and consumer prices gained. Traders increased bets that the Fed will raise its policy rate by June as the Federal Open Market Committee began a two-day rate-setting meeting. Australia’s dollar slumped after a government report showed the nation’s economy expanded less than economists had forecast.

“With data pointing to the upside in the U.S. economy, there’s growing speculation that there will be a change in rhetoric on monetary easing,” said Masahiro Ito, senior manager of foreign-exchange sales and marketing at Central Tanshi FX Co., a unit of Japan’s largest money broker. “If that happens, the dollar carry-trade faces the risk of unwinding.”

The dollar traded at $1.4542 per euro at 9:36 a.m. in Tokyo from $1.4538 in New York yesterday when it reached $1.4504, the strongest level since Oct. 2. The U.S. currency was at 89.58 yen from 89.61 yesterday after reaching 89.95, the strongest level since Dec. 7. The yen fetched 130.26 per euro from 130.29.

Australia’s dollar sank 0.3 percent to 90.36 U.S. cents. Gross domestic product gained 0.2 percent in the third quarter, the Bureau of Statistics in Sydney said today. The median estimate from economists was for a 0.4 percent expansion.

U.S. builders broke ground on 574,000 houses in November at an annual pace, up 8.5 percent, according to a Bloomberg News survey of economists ahead of the data’s release today.

Consumer, Wholesale Prices

Consumer prices rose 0.4 percent in November on higher gasoline prices following a 0.3 percent increase in the previous month, according to the survey median before a Labor Department report today.

Prices paid to producers rose 1.8 percent last month after a 0.3 percent increase in October, the Labor Department reported yesterday. The median forecast of 77 economists in a separate Bloomberg survey was for a 0.8 percent increase.

Fed funds futures on the Chicago Board of Trade indicated yesterday a 53 percent chance that the Fed will raise its target lending rate by at least a quarter-percentage point by its June meeting, compared with 48 percent odds the day before.

All of the 97 economists in a Bloomberg survey expect the Fed will keep the target lending rate at zero to 0.25 percent when it releases its statement today.

Demand for the euro weakened after European Central Bank council member Ewald Nowotny said he sees no need to raise interest rates in the first half of 2010 as inflation pressures stay muted.

“Our interest rate decisions are to be seen in connection with our price stability goal and in this context I do not see major threats for price stability in the near future,” Nowotny, 65, said in an interview in Vienna.

ECB Rates

The Frankfurt-based central bank is starting to withdraw emergency measures designed to fight the financial crisis as the euro-region economy recovers from its worst recession since World War II. While President Jean-Claude Trichet says the ECB has no immediate plan to raise its benchmark rate from the current 1 percent, officials have given themselves room to do so next year if necessary.

The euro may fall for a fifth day versus the pound as Greece struggled to address concern that it isn’t doing enough to reduce its debt and Austria nationalized Hypo Alpe-Adria Bank International AG.

‘Radical’ Action

Austria announced on Dec. 14 that it was nationalizing Hypo Alpe-Adria Bank and injecting as much as 450 million euros ($655 million) into the lender. The nation’s banks may need to strengthen their capital in the medium term, according to the central bank, citing stress-test results.

Greece’s 10-year government bond fell yesterday, pushing the yield up as much as 0.29 percentage point to 5.76 percent, the highest level since April. Prime Minister George Papandreou pledged this week “radical” action to bring the country’s budget deficit within European Union limits by 2013.

“Strenuous concerns over the health of finances in some member countries of the euro will exert downside pressure on the euro against the pound in the near-term,” said Akane Vallery Uchida, a currency strategist at Royal Bank of Scotland Group Plc in Tokyo.

The euro traded at 89.35 U.K. pence from 89.36 yesterday when it dropped 0.6 percent.