By Ron Harui Dec. 31 (Bloomberg) -- The dollar headed for its first annual gain versus the yen since 2006 as reports next week may show the U.S. recovery is picking up, backing the case for the Federal Reserve to withdraw stimulus, pushing up bond yields. The greenback headed for its first monthly advance against the euro since June on speculation manufacturing in the U.S. expanded for a fifth month and employers didn’t cut any jobs in December. The yen was at a three-week low versus the euro on prospects the Bank of Japan will add to credit-easing measures to revive growth in the world’s second-largest economy. “A combination of higher U.S. yields and further signs of improvement in the labor situation in the U.S. should continue to underpin the dollar,” said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney. “There is a stronger sense that 2009 was not as kind to the Japanese economy as it was to other parts of Asia. We are set to see more policy options being discussed within the BOJ.” The U.S. currency bought 92.39 yen at 6:04 a.m. in London from 92.44 yen in New York yesterday, when it reached 92.77 yen, the strongest level since Sept. 8. The dollar traded at $1.4370 per euro from $1.4339. The euro was at 132.76 yen from 132.54, after earlier touching 132.85 yen, the highest since Dec. 7. The dollar has fallen this year against all of the 16 most- traded counterparts except for the yen as a global recovery eroded demand for the safety of the world’s reserve currency. Bought Back Gains in the dollar were tempered on speculation the U.S. currency’s recent rally was overdone. Futures traders increased bets this month the euro will decline against the dollar, figures from the Washington-based Commodity Futures Trading Commission showed. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 16,448 on Dec. 15, compared with net shorts of 511 a week earlier. The status of futures positions are often seen as a contrarian indicator. “The dollar has been bought back in December on profit- taking by people who had been selling it earlier this year,” Darius Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong, said in a Bloomberg Television interview. “This kind of year-end profit-taking is only temporary.” Currencies of commodity producers are headed for this year’s biggest advances against the dollar, led by the Brazilian real and South Africa’s rand, as raw materials prices are poised to rise the most since 1979. The real has surged 33 percent and the rand is up 29 percent as demand from China helped drive the Reuters/Jefferies CRB Index of 19 commodities to a 23.6 percent gain. U.S. Manufacturing The U.S. currency has risen 7 percent versus the yen this month and headed for a 2 percent annual advance. The dollar has fallen 9.9 percent versus the yen in the past 10 years. The Institute for Supply Management’s manufacturing index climbed to 54.0 in December from 53.6 in November, according to a Bloomberg News survey of economists. Readings above 50 signal expansion. The Tempe, Arizona-based group will release its report on Jan. 4. U.S. payrolls were unchanged in December, after falling 11,000 in November, a separate Bloomberg survey showed. The Labor Department will release its report on Jan. 8. The yield premium offered by 10-year Treasury notes over similar-maturity Japanese bonds remained near the widest in more than two years, making U.S. debt more appealing than Japan’s securities. The spread was at 2.50 percentage points today after reaching 2.54 percentage points on Dec. 24, the highest since December 2007 based on closing prices. Bank of Japan The yen dropped this month against the dollar after the Bank of Japan said on Dec. 18 it was intolerant of price declines amid signs deflation may undermine the economic recovery. Governor Masaaki Shirakawa said Dec. 24 his policy board is ready to act to support growth. “There are some expectations that the BOJ may do more on quantitative easing,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “We see dollar-yen going higher.” Rising optimism that Switzerland’s economy is recovering is pushing up the nation’s currency without spurring intervention by the Swiss National Bank, according to BNP Paribas SA. “It seems increasingly clear that the SNB is following the broad franc,” analysts led by Hans-Guenter Redeker, London- based global head of foreign-exchange strategy at BNP Paribas, wrote in a research note yesterday. “As long as the euro-dollar falls and the economy is improving, there is no need to intervene actively in the euro-swiss.” Switzerland’s economy returned to growth in the third quarter after a yearlong contraction. Gross domestic product rose 0.3 percent from the second quarter, when it fell 0.3 percent, the State Secretariat for Economic Affairs in Bern said on Dec. 1. The franc was at 1.4869 per euro from 1.4864 yesterday. It has climbed 1.5 percent against the euro this month for a 0.4 percent advance this year. To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net;

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