Dollar Rises to Three-Month High on Recovery Signs, Fed Outlook

Dec. 30 -- The dollar climbed to a three-month high against the yen on speculation the Federal Reserve will withdraw stimulus measures as the economy recovers, pushing bond yields higher.

The dollar rose versus the euro and headed for its first monthly advance since June as an index of U.S. business strength reached the highest level in almost four years. Currencies of raw-material producers including the Canadian and Australian dollars weakened as commodity companies led declines by stocks.

“The massive monetary easing is beginning to show up in terms of an improved economy,” said Joseph McAlinden, a fund manager at Catalpa Capital LLC in New York, in an interview on Bloomberg Television. “The foreign-exchange market should begin to look ahead to a better return on dollar assets. The dollar is a strong currency for 2010.”

The dollar gained 0.6 percent to 92.52 yen at 10:10 a.m. in New York, from 92 yesterday. It touched 92.56, the highest level since Sept. 9. The dollar appreciated 0.4 percent to $1.43 per euro, from $1.4354. It reached $1.4291, the strongest since Dec. 23. The euro increased 0.2 percent to 132.29 yen, from 132.05.

The Canadian currency declined 1 percent to C$1.0540 per U.S. dollar, and the Australian currency weakened 0.2 percent to 89.31 U.S. cents. The MSCI World Index fell 0.5 percent, with the materials sub-index declining 1 percent, the biggest drop among the 10 groups that make up the benchmark stock gauge.

Dollar Versus Euro

The dollar has appreciated 4.9 percent versus the euro this month, trimming its 2009 decline to 2.3 percent. The greenback has fallen 30 percent against the euro in the past 10 years.

The Institute for Supply Management-Chicago Inc. said today its business barometer increased this month to 60, the highest level since January 2006. The median estimate of 53 economists in a Bloomberg survey was for a reading of 55.1. Readings above 50 signal expansion.

The dollar rose as the yield premium offered by 10-year Treasury notes over similar-maturity Japanese bonds stayed near the widest in more than two years, making U.S. debt more appealing than Japan’s securities. It reached 2.53 percentage points on Dec. 24, the highest level since December 2007 based on closing prices, and was at 2.50 percentage points today.

“The markets are anticipating that the Fed will raise rates,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. “There’s little chance of Japanese monetary authorities shifting their policy towards tightening. That’s positive for the dollar.”

Demand for the yen waned as Reuters reported that Standard & Poor’s said Japan’s AA credit rating could be threatened if policies fail to stabilize and gradually reduce the nation’s huge debt burden.

S&P is focusing on Japan’s medium-term fiscal trajectory and the feasibility of the government’s policy for fiscal consolidation, Takahira Ogawa, director for sovereign ratings at S&P in Singapore, said two weeks ago. The deteriorating trend for Japan’s credit quality doesn’t warrant a change in the nation’s rating outlook or a downgrade, he said.