Dollar Near Two-Month High Versus Euro

Tokyo -  The dollar traded near a two-month high against the euro amid speculation improving economic data in the U.S. will spur the Federal Reserve to signal an exit from easing policies intended to combat the recession.

The dollar rose against 14 of its 16 major counterparts as futures indicated a 48 percent chance that the Fed will raise its key rate by at least a quarter-percentage point from near zero by June. The Australian dollar fell after the central bank said its decision to raise borrowing costs two weeks ago for a third-straight month gave policy makers increased “flexibility” at future meetings.

“Good data will eventually start supporting the dollar, if they begin to affect the rate outlook” in the U.S., said Kazumasa Yamaoka, a senior analyst in Tokyo at GCI Capital Co., a foreign-exchange margin-service company. “People had felt an exit was nowhere near, but they are gradually beginning to see that possibility somewhere in the near future.”

The dollar traded at $1.4635 per euro as of 6:58 a.m. in London from $1.4656 yesterday in New York. It climbed to $1.4586 on Dec. 11, the strongest level since Oct. 5. The greenback advanced to 88.92 yen from 88.62. The yen was at 130.13 per euro from 129.90. Australia’s currency dropped 0.4 percent to 91.26 U.S. cents.

Factory Output

U.S. industrial output rose 0.5 percent in November following a 0.1 percent gain the previous month, according to a Bloomberg News survey before the Federal Reserve report today. In the same month, U.S. builders broke ground on 575,000 houses at an annual pace, up 8.7 percent, according to a separate survey ahead of tomorrow’s data.

The Federal Open Market Committee will announce its decision on interest rates tomorrow at the end of a two-day meeting. Fed funds futures on the Chicago Board of Trade show a 100 percent chance the central bank will refrain from raising borrowing costs at that time.

“They will need to see a lot more, better numbers consistently, not just for one or two months, before they would start to genuinely be talking more hawkish,”David Mann, senior strategist at Standard Chartered Plc in Hong Kong, said in an interview with Bloomberg Television. “In the absence of that, I think the markets may be disappointed if they’re looking for hints of hikes coming soon.”

‘Extended Period’

Fed officials pledged at their Nov. 4 meeting to keep rates near zero for “an extended period” and specified for the first time that policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline.

The Australian dollar declined as traders lowered to 66 percent from 80 percent yesterday the possibility of a rate increase when the central bank meets next on Feb. 2, according to a Credit Suisse AG index.

Minutes released today from the Reserve Bank of Australia’s December meeting “suggest that they could consider a pause at the following meeting,” said Richard Grace, chief currency strategist in Sydney at Commonwealth Bank of Australia.

“The bigger risk for the Aussie is that the Fed’s statement is slightly more upbeat and therefore the U.S. dollar strengthens as market participants bring forward the timing of a rate rise in the U.S.” Grace said.

Demand for the euro was tempered before the ZEW Center for European Economic Research releases its index of investor and analyst expectations today. The gauge fell to 50 this month from 51.1 in November, according to a Bloomberg survey.

Euro Selling

“A weak headline figure may trigger selling of the euro, combined with lingering concern over the health of sovereigns in the region,” said Akane Vallery Uchida, a currency strategist at Royal Bank of Scotland Group Plc in Tokyo.

Spain had the outlook on its AA+ debt rating cut to “negative” from “stable” by Standard & Poor’s last week. Greece’s credit was reduced one step to BBB+ by Fitch Ratings, and Portugal’s outlook was revised to “negative” from “stable” by S&P.

The yen weakened against 12 of its 16 major counterparts as easing concern about default in Dubai curbed demand for Japan’s currency as a refuge. Abu Dhabi yesterday pledged $10 billion in aid to Dubai.

“Underlying risk appetite remains intact as credit fears wane and the economy looks to be on the mend,” said Minoru Shioiri, chief manager of foreign-exchange trading at Mitsubishi UFJ Securities Co. in Tokyo. “Money will continue to favor higher-yielding currencies over cheaper ones.”