Dollar Gains Toward Four-Year High Versus Euro on Rates Outlook

June 9 (Bloomberg) -- The dollar gained toward a four-year high against the euro on speculation U.S. policy makers will reiterate that an economic recovery is gaining pace.

The euro weakened against 11 of its 16 most-traded counterparts as economists surveyed by Bloomberg forecast the European Central Bank will leave its key interest rate at a record low until the second quarter of 2011. The ECB next meets tomorrow. Federal Reserve Chairman Ben S. Bernanke testifies before a House Budget Committee today after saying June 7 in Washington that the central bank will raise rates before the economy returns to full employment. The yen rose as Asian stocks fell, spurring demand for the safest assets.

“The Fed will be tightening before the ECB with the U.S. economy recovering at a faster pace,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “Both those things are dollar supportive.”

The dollar gained to $1.1946 per euro as of 9:35 a.m. in Tokyo from $1.1973 in New York yesterday. It climbed as high as $1.1877 per euro on June 7, the strongest since March 2006. The dollar bought 91.35 yen from 91.46. The yen rose to 109.12 per euro from 109.51 yesterday, when it fell 0.5 percent.

Kansas City Federal Reserve Bank President Thomas Hoenig said the U.S. is in a “modest, sustained” recovery in a speech in Kansas City. The Fed should begin to normalize policy with rates near zero “unsustainable,” he said.

The Fed’s benchmark interest rate has been in a range of zero to 0.25 percent since December 2008.

Fed Funds Rate

Hoenig’s view hasn’t shifted since the European debt crisis last month posed a risk to the U.S. recovery. He repeated that the funds rate should be raised to 1 percent by end September. Hoenig has voted against central bank statements, saying in April the “extended period” language limited the Fed’s “flexibility to begin raising rates modestly.”

Futures trading on the CME Group exchange showed a 32 percent chance the Fed will raise its target rate for overnight bank lending by at least a quarter-percentage point by its December meeting, down from 50 percent a month ago.

The pound fell versus most of its major peers after Fitch Ratings said yesterday the U.K.’s fiscal challenge is “formidable.”

Budget Cuts

Fitch suggested British Prime Minister David Cameron will need to speed up budget-deficit cuts to protect the U.K.’s top credit rating. Treasury estimates show government debt-interest costs reaching 70 billion pounds ($101 billion) in five years, up from 31 billion pounds in the last fiscal year.

“The scale of the United Kingdom’s fiscal challenge is formidable,” Fitch said in the first statement by a credit- rating firm on the U.K. since Cameron took office May 11.

The government will unveil an emergency budget June 22, outlining cuts to tackle a deficit that reached 11.1 percent of gross domestic product in the fiscal year through March.

The euro gained yesterday for the first time in four days against the dollar and yen on speculation the Swiss National Bank intervened to weaken the franc after it touched a record high versus Europe’s shared currency. The franc yesterday gained as much as 0.9 percent to 1.3746 per euro, a record. It traded at 1.3778 today.

‘Pushing Back’

“The euro’s abrupt rebound against the Swiss franc, coming around the end of the European trading session, suggests that Swiss officials might be pushing back by intervening to slow their currency’s rise,” said Joe Manimbo, a market analyst in Washington at Travelex Global Business Payments, a currency- exchange network.

A spokesman for the SNB, Werner Abegg, declined to comment. Central banks intervene by buying or selling currencies to influence exchange rates.

The euro-region’s debt crisis may prompt the European Central Bank to buy bonds as part of a so-called quantitative- easing program to spur the economy, HSBC Holdings Plc said.

“The ECB has been running ultra-loose policy now for more than one year, and I can only imagine we will take further steps toward increased government purchases,” Steven Major, London- based global head of fixed-income research at HSBC, said yesterday in a presentation in London. “The problem for the euro zone is that we just have too much debt.”

European finance ministers put the finishing touches this week to the European Financial Stability Facility, a fund backed by 440 billion euros ($525 billion) in national guarantees designed to halt the spread of the debt crisis that began in Greece.