By Ye Xie and Anchalee Worrachate Sept. 21 (Bloomberg) -- The dollar increased to a one-week high against the yen before this week’s Federal Reserve meeting as a report today showed U.S. leading economic indicators gained in August for a fifth consecutive month. The yen dropped against all but two of its 16 most-traded counterparts tracked by Bloomberg on speculation repatriation of funds by Japanese companies will wane toward the end of the month, when the fiscal half-year closes in Japan. The dollar rose against the euro for a second day on bets its 2 percent sell-off since the end of August is too fast to sustain. “I don’t think the underlying trend of a weak dollar has changed, but I won’t be surprised to see people cut risk before the Fed meeting this week,” said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada’s biggest bank by assets. “Given the one-sided nature of the move over the past few days, the dollar became extremely oversold.” The dollar rose 1.1 percent to 92.33 yen at 10:03 a.m. in New York, from 91.29 yen on Sept. 18, after reaching 92.53, the highest level since Sept. 9. The dollar strengthened 0.4 percent to $1.4647 per euro, from $1.4712. The yen declined as much as 0.9 percent to 135.48 per euro, the weakest level since Aug. 25, before trading at 135.23, compared with 134.33 last week. The pound touched a five-month low versus the euro as U.K. stocks declined and the Bank of England said on its Web site “the long-run sustainable real exchange rate” for the currency may have fallen during the financial crisis. Sterling declined as much as 0.4 percent to 90.78 per euro, the weakest level since April 24, before trading little changed at 90.43. Britain’s currency depreciated 0.6 percent to $1.6168. Dollar Index The Dollar Index, which the ICE uses to track the greenback against the currencies of six major U.S. trading partners, rose 0.8 percent to 76.026. It fell 5.3 percent this year as signs of global recovery reduced the haven appeal of the U.S. currency. The 14-day relative strength index on the euro versus the dollar reached 73.59 on Sept. 17, the highest since March. A reading above 70 tends to indicate the European currency’s gain has reached an extreme and a reversal may be coming. The Fed will keep its target rate for overnight loans in a range of zero to 0.25 percent at its two-day policy meeting starting tomorrow, according to all 91 economists surveyed by Bloomberg News. Chairman Ben S. Bernanke and colleagues may talk more at the Federal Open Market Committee meeting on how to wind down purchases of mortgage-backed securities. Outlook on Fed “Investors are keen to see to what extent the Fed will acknowledge the improvement in the recent economic data, and the market might be positioning for that,” said Henrik Gullberg, a currency strategist in London at Deutsche Bank AG. The Conference Board’s gauge of the U.S. economic outlook for the next three to six months increased 0.6 percent last month, after a revised 0.9 percent gain in July. The median forecast of 58 economists surveyed by Bloomberg News was for a 0.7 percent increase. Further gains in the dollar may be limited on evidence central banks may have been diversifying out of the U.S. currency into the euro, according to JPMorgan Chase & Co. While global foreign exchange reserves are growing at close to $100 billion per month, official purchases of U.S. assets ran at around $50 billion, the bank wrote in a research note to clients on Sept. 18. “The circumstantial evidence -- official buying of U.S. assets runs at only half the pace of global reserve accumulation -- suggests that diversification has accelerated since June,” wrote JPMorgan analysts including John Normand in London. JPMorgan on Dollar JPMorgan said investors should sell the dollar against the euro and Australian dollar, which dropped 0.7 percent to 86.16 U.S. cents today after rising to 87.75 on Sept. 17, the highest level since August 2008. The yen fell 0.7 percent to 6.92 versus the Mexican peso and 0.6 percent to 149.38 per pound on speculation Japanese companies will slow repatriation. Financial markets in Japan are closed for a holiday today, tomorrow and the next day. Japan will be the only Group of 10 nation that won’t raise borrowing costs in 2010, keeping its benchmark interest rate at a record low of 0.1 percent, according to the median forecast of 40 estimates in a Bloomberg survey. Goldman Sachs Group Inc. predicts the yen will weaken to 98 per dollar and 142 per euro by the end of the year as Japan’s economic recovery moderates.

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