By Candice Zachariahs Dec. 23 (Bloomberg) -- The dollar may extend this month’s biggest gain since February versus the yen as a recovery in the U.S. economy pushes up yields, damping the greenback’s use in so-called carry trades, Royal Bank of Scotland Group Plc said. The dollar gained against 15 of the 16 most-traded currencies this month, jumping 6 percent against the yen and poised for its largest monthly advance since February’s 8.5 percent surge. U.S. bond yields climbed since Nov. 30 as reports showed the nation’s jobless rate unexpectedly fell, retail sales beat forecasts and purchases of existing homes rose to the highest level in almost three years. “The more stable data trend is supporting a turnaround in the dollar; increasing the odds that the Fed will be thinking about edging policy rates out of their emergency setting at some stage next year,” Greg Gibbs, a strategist at Royal Bank of Scotland Group Plc in Sydney, wrote in a note to clients. “Certainly the renewed strength in the dollar may be discouraging funding carry trades out of the dollar, and renewing the case for funding out of the yen or even the euro.” The dollar fetched 91.60 yen as of 11:15 a.m. in Tokyo, from 91.83 yen yesterday in New York. It earlier reached 91.87 yen, the strongest since Oct. 27. The currency traded at $1.4272 versus the euro from $1.4249 yesterday, when it touched $1.4218, the highest since Sept. 4. The dollar has gained 5.1 percent against the euro this month, heading for the largest advance since January. Funding Costs The dollar dropped after three-month London interbank borrowing costs in the currency fell below yen rates on Aug. 24 for the first time since 1993. The U.S. currency slid 8.3 percent between that date and Dec. 1. Benchmark interest rates are 0.1 percent in Japan and as low as zero in the U.S., compared with 8.75 percent in Brazil and 3.75 percent in Australia, prompting investors to borrow low-cost funds and invest them in assets with higher yields. The risk in such so-called carry trades is that currency market moves will erase profits. Futures traders are now betting on a 48 percent chance that the Federal Reserve will increase the target rate for overnight lending between banks by June. That’s pushed the premium offered by two-year Treasuries over similar maturity Japanese bonds to 74 basis points from 43 basis points on Nov. 30. The extra yield offered by European two-year bonds has narrowed to 27 basis points from 59 points over the same period, Bloomberg data show. A basis point is 0.01 percentage point. To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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